In addition to cash flow considerations where a borrower may extinguish a regular traditional mortgage and the corresponding payment, or provide additional monthly cash flows from the loan, a reverse mortgage can be a tax planning tool. The cash distributions from a reverse mortgage are generally not taxable income.Borrowers can supplement cash flow needs from a reverse mortgage and reduce the taxable distributions that other retirement assets may trigger. Any income that you receive from a reverse mortgage does not generally affect your Social Security or Medicare benefits.
Some reverse mortgage holders may elect to make optional voluntary payments on their reverse mortgage.If the reverse mortgage holder has line of credit option1, they may elect to make payments that are then added to the available line of credit which grows over time for future use, at the same time decreasing deferred interest. Tax deductible mortgage interest expense may come into play in the tax year in which those voluntary payments have been made as it is applied to interest first and added to the available line of credit. Reverse mortgage loans become due when you sell the home, move away, or die, which are called maturity events2.
After a maturity event and the loan is paid off, the loan servicer issues a 1098 for home mortgage interest, which may serve to offset the tax implications of liquidating other taxable assets in the estate. Consult with your tax professional to determine the proper tax treatment. A reverse mortgage is a complex transaction with many different strategies. Given the complexities of this loan, consulting with a competent reverse mortgage specialist, in addition to your Financial Advisor and Tax Professional are imperative to assist you in making the best decisions given your unique situation.We here at Watermark Capital are ready and able to assist you as you consider these options.
