Deducting a reverse mortgage
- Posted by admin on June 14th, 2007 filed in Reverse Mortgage Info
Q: Harold P. asks, “I have a reverse home mortgage. I understand that I cannot deduct interest on my home mortgage on my income tax return until I actually pay the interest. (Interest on a reverse mortgage is added to the loan balance each year but is not paid until the loan is repaid, usually at maturity or when the home is sold.)
“I will be paying approximately $20,000 per year interest on paper until I sell my home. If I sell my home in five or 10 years, I will have paid $100,000 to $200,000 in interest. I can’t believe the government will allow me to deduct that amount when I sell my home. Isn’t there some way I can deduct that interest while the interest is accumulating before I sell my home?”
A: Last question first: No, for practical purposes, Harold cannot deduct the interest each year while it is accumulating.
The only way he could do this is if he switched to the accrual method of accounting, which is not generally feasible for individual taxpayers, who typically use the cash method, says Michael Gray, a certified public accountant in San Jose, Calif.
First question: Harold’s tax deduction could be limited, depending on how he used the money.
In general, you can deduct interest on up to $1 million in mortgage debt secured by your home as long as you use the money to buy, build or substantially improve that home.
If you borrow money secured by your home and use it to do anything other than to buy, build or improve your home, the loan is considered home equity debt. In general, you can deduct interest only on up to $100,000 in home equity debt. (The $100,000 limit applies to the amount of debt, not the interest payment on that debt.)
Assuming he had no other debt on his house, if Harold took out a reverse mortgage for $250,000 and used $50,000 to remodel his kitchen and $200,000 to buy a car, take a trip and pay medical bills, he could deduct interest on only the first $150,000 worth of debt.
Note: Home equity debt is not deductible under the alternative minimum tax.
Found here.
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November 11th, 2007 at 7:18 pm
The interest is deductable, subject to certain limitations, when the interest is actually paid. Typically, upon one’s demise the executor pays off the mortgage so the accrued interest is deductable of US Form 1041 - Estate Income Tax return.