Sacramento CPA, Tax, Accounting, Bookkeeping
Reverse Mortgages
Reverse mortgages are structured to assist individual taxpayers who have little cash, but have equity in their personal residences. A taxpayer can turn the value of his home into cash without repaying the loan monthly and the loan offers tax free proceeds. An individual taxpayer, however, may have difficulty qualifying for Medicaid, and there’s no tax deduction for mortgage interest since no payments are being made.
Who are reverse mortgages available to?
Anyone over the age of 62 who owns a home are eligible for a reverse mortgage whether or not the home is paid off.
Most reverse mortgages are federally-insured home equity conversion mortgages (HECMs) administered by HUD. State and local taxing authorities, which are the least expensive, offer single purpose reverse mortgages that can only be used for specific circumstances, such as paying property taxes. The most expensive reverse mortgages are proprietary reverse mortgages offered by private lenders.
The funds can be paid to the taxpayer in a single sum, monthly payments, a credit line, or a combination.
What amount can be borrowed?
The amount a taxpayer can borrow depends on the age at the time of the reverse mortgage, equity in the home, and current interest rates. A credit line allows the most flexibility for the taxpayer and the unused balance grows over time.
What are the tax consequences?
Accrued interest isn’t tax deductible unless the taxpayer pays the interest. This interest would be considered home mortgage interest. The interest would be limited to $100,000 of equity debt unless the proceeds from the reverse mortgage were used for home improvements. If the taxpayer died, the interest would be a tax deduction of his estate.
When is the loan due?
The loan must be repaid when the residence that secured the loan is sold, the taxpayer (borrower) dies, or the home is no long used as his principal residence. The loan agreement may be structured that interest is added to the balance of the loan as it accrues on a monthly basis.
Impact on benefits
Money received from reverse mortgages doesn’t have an impact on Social Security or Medicare benefits, but it could affect SSI and Medicaid. Funds from reverse mortgages are viewed as liquid assets that could push the taxpayer’s assets above the qualification level.
Before a reverse mortgage is considered, taxpayers should look into low cost public loans, private loans, public assistance, or even selling their home.
When does a reverse mortgage have to be paid?
A taxpayer doesn’t have to off pay the loan from a reverse mortgage unless one of the following situations occurs:
- The last surviving spouse dies, sells, or moves out of the house.
- The taxpayer doesn’t pay the property taxes or fails to insure it.
- The taxpayer declares bankruptcy.
- Condemnation of the house.
Alternatives
Reverse mortgages don’t make sense due to the high cost and low rate of return. It would be better to sell the house and purchase a smaller house which would have lower maintenance costs, utilities, and property taxes.
A taxpayer who has limited cash should consider opening a line of credit. This is inexpensive and the taxpayer only has to pay the interest which would be small as long as the line is not abused. The line of credit could be rolled into a reverse mortgage later on if the payment can’t be made.
The bottom line is that a reverse mortgage should only be used as a last resort.