Reverse mortgage taxes

The short answer on reverse mortgage taxes: what you receive from a HECM counts as a loan rather than income, so no income tax applies to it. Interest can be deducted only once it is actually paid, and for most borrowers that happens when the loan is repaid. As before, you still owe property taxes every year.

In general, these rules apply. Consult a tax adviser about your own tax return. Talk with your state Medicaid office or an elder-law attorney about Medicaid planning.

Does a reverse mortgage count as income?

No. A HECM lump sum, line of credit draw or monthly payment provides money borrowed against your home. The IRS views this money as a loan advance rather than earnings, so you do not report it as income on your tax return.

This also means:

• it neither raises nor reduces your Social Security benefit
• Your Medicare coverage and premiums stay the same.
• No retirement benefit counts it as earned income.

Is interest on a reverse mortgage deductible?

You can deduct it only when you pay it, and only under the normal home mortgage interest rules that apply. For a HECM, monthly interest increases the balance instead of being paid. IRS Publication 936 says that interest added to the balance cannot be deducted until payment, usually when the loan is repaid in full.

The deduction may still be limited. Usually the deduction covers only interest on money you spend on buying, building or substantially improving the home. Interest on funds used for living expenses usually cannot be deducted. Because repayment often comes after the borrower's death, the estate or heirs often handle the question. A tax adviser can tell you how this works in your situation.

Reverse mortgage and property taxes

You keep paying any HOA dues, along with homeowners insurance and property taxes. Unless you set aside money for those costs when closing, a reverse mortgage will not pay them.

The most common reason borrowers with a HECM lose a home is falling behind. At one point, about 54,000 HECM loans, about 10% of the total, had missed property tax or insurance payments, according to the Congressional Research Service.

These two things can help:

• Money set aside. Your lender may reserve part of your loan to cover your taxes and insurance. It reduces what you can draw and leaves you without the worry.
• Tax relief from the state. Many states offer exemptions, freezes or deferrals for senior property taxes. Pages for each state in reverse mortgage by state identify the program and provide a link to the official source.

Reverse mortgage and Medicaid

Because Medicaid and SSI are means-tested, the timing of your draws is important. The basic rule is:

1. In the month you receive it, loan money does not count as income.
2. At the start of the next month, money you still hold counts as a resource.
3. If this amount takes you above your state's asset limit, your eligibility may be affected.

Often the safest plan is to withdraw only the amount you will spend in that month, leaving the remainder in a credit line you do not touch. The ACL page on paying for long-term care names reverse mortgages among the ways people pay for care. Because each state has its own rules, contact your state Medicaid office before drawing a large sum.

If you go to live in a nursing home

With a HECM, your home must remain your main residence. According to the DC banking regulator, when a health condition keeps you out of the home for more than 12 months, the reverse mortgage becomes due. If an eligible spouse who does not borrow or a co-borrower still lives there, the loan can continue.

Social Security and Medicare

Both remain unchanged. Neither Social Security retirement benefits nor Medicare uses means tests. HECM money therefore leaves both unchanged. Only means-tested programs assess your bank balance. Medicaid, SSI, plus some state aid, are examples.

Taxes when the home is sold

The normal tax rules for selling a home still apply, and a HECM does not change them. When you or your heirs sell the home, the loan is paid off from the sale proceeds. Capital gains rules then apply as they would without a reverse mortgage. In general, heirs receive the home at its value on the date of death, so a quick sale often produces little or no taxable gain. A tax adviser or estate attorney can confirm what this means for your family.

Who to ask

• Ask a tax adviser or CPA about interest deductions and sale questions.
• Ask an elder-law attorney about Medicaid planning and estate matters.
• Your state Medicaid office: asset limits and timing.
• Consult a HUD-approved counselor about how a HECM works with your full range of benefits.

Questions people ask

1. Must I pay taxes on reverse mortgage income?

   They are not taxed as income. HECM payments are loan money, not income.

2. Is interest on a reverse mortgage deductible?

   Interest counts as deductible only once you actually pay it, usually when you pay off the loan, and only under the home mortgage interest rules. Talk with a tax adviser before relying on it.

3. Does having a reverse mortgage disqualify me from Medicaid?

   No, not on its own. If you keep loan money into the next month, it can count as an asset. Check your state's rules and withdraw only the amount needed.

4. Who pays property taxes when using a reverse mortgage?

   You are the one who does. The borrower must continue paying property taxes and insurance unless some of the loan was reserved at closing to cover those costs.

5. If I enter a nursing home, what happens to my reverse mortgage?

   The loan falls due after health-related absences last longer than 12 months, unless another borrower or an eligible spouse lives in the home.

6. Is Medicare affected by a reverse mortgage?

   No. Since Medicare is not means-tested, a HECM does not affect your coverage or premiums.