If you are contemplating going with a reverse mortgage or HECM loan, it is imperative to research this unique retirement option's financial impact. A reverse mortgage allows you to capitalize on your home by turning it into loan funds that you can use as you wish.
To be eligible for a reverse mortgage, certain criteria must be met, for example:
You have substantial equity in your home
You live on a property that serves as your main residence
You must be 62 years of age or over
You may be wondering how taxes affect the situation when you are considering a reverse mortgage. Read on for a complete overview of reverse mortgages' tax implications.
How Does a Reverse Mortgage Work? What are the costs?
A reverse mortgage is a monetary product that retirees can use to convert their home's value into usable loan income.
The costs of the reverse mortgage vary by lender. Still, at least you can expect to pay an upfront fee, which includes the cost of a HUD-approved counseling session, insurance fees, property taxes, and other necessary financial obligations.
How Does a Reverse Mortgage Affect Taxes?
A reverse mortgage enables you to transform your equity or interest in your home into loan funds. For this reason, one of the advantages of a reverse mortgage is that you don't have to pay IRS taxes on the loan funds.
The costs for which you are responsible for a reverse mortgage include property taxes, home insurance, and all other expenses related to the property, amid other reverse mortgage fees that differ depending on the lender and the circumstances.
Is reverse mortgage income taxable?
According to the IRS, there is no "reverse mortgage tax" because reverse mortgage income is not considered income. Rather, they are loan funds and, therefore, do not fall under the category of "earned income."
Reverse mortgage payments usually do not affect benefits such as Social Security and Medicare, but this can vary from case to case.
Note: The reverse mortgage product can be paid in a single payment, line of credit, monthly payment, or a combination. However, not all payment options will be subject to the reverse mortgage.
Is Interest Paid On Reverse Mortgages Deductible?
Some or all of the interest earned on a HECM loan may be deductible, but only when the interest is paid. Interest needs to be paid when the loan becomes due. This happens when a maturity event occurs. A maturity event can be one of the following life cases, such as when you:
Do not carry out home maintenance, such as repairs, according to FHA standards.
Live in the property for 12 consecutive months
No property tax or insurance is paid
Pass away
Sell your house
The final loan balance owed on the reverse mortgage includes interest accrued during the loan agreement, mortgage insurance premiums, and other unpaid financial obligations.
The deduction of interest on the reverse mortgage has the same limits as other equity loans; you cannot deduct interest on a $100,000 loan.
Are you required to pay property taxes when there is a reverse mortgage?
Yes, you have to pay property taxes, keep your property, and pay for home insurance with a HECM loan.
Property Maintenance
The FHA has minimum property standards designed to protect the home's occupants' health and the integrity of the property. These standards include the following:
Adequate roofing
Bathroom with toilet, sink, and shower
Complete electrical box
Properties safe for pedestrians and vehicles
Structural integrity (no decomposition, leakage, termite damage, and other serious problems)
Up to code water heater
Consider these requirements if you know your property will need major repairs or if you live in an old home that is likely to need repairs. You can deduct certain maintenance repairs from your income tax return.
Property taxes and insurance
If you don't pay property taxes and home insurance consistently, or if you don't maintain your property status, your loan may be in default.
If you can't find a way to resolve the issue with your lender, the lender may close your house.
Note: When applying for a loan, the lender takes your general financial situation into account and offers you a loan based on your ability to pay off your financial obligations, such as existing mortgages and property rights.
It is FHA policy that creditors make sustainable loan decisions based on the debtor's financial situation. HECMs are not only designed to help the elderly, but there are also policies to increase the sustainability of the entire HECM program and protect FHA insurance funds.
What if I have problems paying taxes and insurance?
You may have unforeseen medical bills or other life-changing events, and you are in arrears on property taxes or insurance payments. If so, there may be local programs to help you continue living in your home, such as reverse mortgage foreclosure prevention.
If you stop paying insurance and taxes, your lender can foreclose your home, so it's important to keep those payments up to date.
FOR MORE INFORMATION OR TO SEE HOW WE CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CONTACT Flynn Financial Group, Inc, BY CLICKING THE BLUE TAB ON THIS PAGE.
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Flynn Financial Group Inc