Tax Tip of the Week | No. 451 | Tax Considerations of a Reverse Mortgage

Tax Tip of the Week | March 14, 2018 | No. 451 | Tax Considerations of a Reverse Mortgage

Definition - a reverse home mortgage is a loan. Although, not a conventional one. In the case of a reverse home mortgage, the lender pays you while you still live in your home and hold title. In general, your reverse mortgage becomes due along with the interest when you move, sell your home, reach the end of a pre-determined loan period, or pass away.Since reverse mortgages constitute a loan advance, they are not considered taxable income. Most individuals use the cash basis method of accounting, so any loan interest accrued is not deductible until paid. Often, this is when the reverse home mortgage loan is paid in full.This interest deduction may be limited because a reverse mortgage loan is generally subject to the limit on home equity debt.Prior law: Home equity debt is any debt (other than acquisition debt) secured by a home mortgage. The amount of deductible interest may only be on the debt that does not exceed your home’s fair market value, decreased by any acquisition debt. In addition, if you are not using your reverse mortgage loan proceeds to improve your home, the amount that you can treat as home equity debt may not exceed $100,000 or $50,000, if married filing separately. Any equity interest as the result of the loan being over these limits is typically treated as personal interest which is nondeductible. Some notable exceptions include interest from loan proceeds used for investment and/or business purposes.New law:  Whether your home equity loan is considered acquisition indebtedness or home equity indebtedness may determine if this interest will continue to be deductible in 2018 and forward. However, further IRS guidance is necessary as to how the new tax law will be applied in the real world. Some tax professionals feel that all home equity interest will be disallowed while others take the position that home equity interest from acquisition indebtedness will continue to be eligible for a tax deduction in 2018. Stay tuned for further developments.Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.This week's author – Mark Bradstreet, CPA--until next week.