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Mailbag: Is Reverse Mortgage interest tax deductible?

Every year around this time I get calls and emails inquiring about the destructibility of Reverse Mortgage interest. The answer is no, yes, and it probably doesn’t make a difference.

Here is what the IRS has to say…

“…interest (including original issue discount) accrued on a reverse mortgage isn’t deductible until you actually pay it (usually when you pay off the loan in full). A deduction for interest paid on a reverse mortgage loan may be subject to the limit on home equity debt discussed in Part II of Publication 936, Home Mortgage Interest Deduction.”

The key here is that you can’t deduct something you aren’t actually paying so if you are NOT making payments on your reverse mortgage, either in lump sum or regular monthly installments the IRS does not consider the accruing interest deductible in the year accrued and the answer is no. It would however be deductible when the loan is eventually paid off which is typically when the house is sold.

If you ARE making payments on your reverse mortgage, whether lump sum, periodic or monthly, then you are paying the interest and your interest would be deductible. In that case the answer is yes.

Does it really matter?

In my experience the vast majority of folks who ask me this question are in a situation where they are utilizing the standard deduction anyway which for 2016 is $9,300 for head of household, 6,300 for an individual or $12,600 for a married couple. Unless your itemized deductions exceed those figures, the lack of deductible interest expense isn’t impacting your income tax filing by even a single dollar. In this case, the answer is… it doesn’t matter.

Nearly 100% of the my clients tell me they itemize but remember, just because you enter a figure on Schedule A, Line 10, that doesn’t mean it is changing the bottom line tax obligation for you. If the standard deduction is more beneficial to you, there is no need to itemize.  For this reason, it probably doesn’t make a difference in most cases.

Disclaimer: I am not an accountant. This is meant for informational purposes only and should not be relied on as tax advice. Always consult your tax advisor.

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