What are reverse mortgage tax obligations?

Before jumping into the commitment of a reverse mortgage, you need to be aware of what they involve and the associated costs. There are benefits to a reverse mortgage, like not having to make repayments as long as you’re living in the property. You should still be aware of reverse mortgage tax implications when considering the fees and interest rates compounding over the loan term. 

Is money from a reverse mortgage taxable?

The money received on a reverse mortgage is not taxable since it is borrowed against the value of your home and doesn’t qualify as income. In this situation, the borrower isn’t required to make any repayments whilst they live in the home. However, the borrower(s) will eventually have to repay the loan by either selling the house or letting the bank sell it after they pass away. 

It must be noted that seniors who choose to make payments on their reverse mortgage while still living in the home can borrow more later. Also, if you choose to take out mortgage insurance, the premiums may be tax-deductible if your adjusted gross income is less than $100,000.

What is reverse mortgage Capital Gains Tax (CGT)?

Capital gains tax is charged when you sell a property or other investments and make a profit, and they’ve been used to earn an income. There are certain exemptions and rules regarding capital gains tax and property, including reverse mortgage Capital Gains Tax. 

Two criteria will allow you to be exempt from CGT when selling your home with a reverse mortgage. The first is that the borrower must have owned and lived in the house for at least two years. The second is that the borrower must not have received an exemption on CGT from another reverse mortgage home sale in the last two years from the present one. 

These exemption rules may vary from person to person. For example, if you’re a single person, you may be exempt from capital gain up to $250,000. Meanwhile, married couples can be exempt from CGT on capital gain up to $500,000 jointly. 

Are any reverse mortgage expenses tax deductible?

The basic fees, statutory charges, or the mortgage registration fees and reverse mortgage expenses are tax-deductible. But this only applies when the borrower decides to make repayments.  

Suppose the house is repaired or renovated with a part of the money from the reverse mortgage. In that case, the money you use is eligible for a deduction once the property value is calculated.

But there is no obligation for you to pay anything unless you decide to move out or change the lender. If you don’t make payments, there is nothing to claim as a tax deduction.

Bottom-line on reverse mortgage tax obligations

Tax obligations associated with reverse mortgages are tricky, especially if you’re not well-versed in the rules. However, it’s important to understand that nothing is taxable unless you sell the house and profit after paying off the reverse mortgage amount. 

You also need to remember that making the full payment, including all interest, charges, and house repair costs, is tax-deductible. 

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