Understanding Reverse Mortgages
A reverse mortgage is a loan option available to homeowners aged 62 and older. Instead of making monthly payments to a lender, the lender pays the homeowner in various ways. The loan allows homeowners to convert part of their home equity into cash without selling the property. The loan is typically repaid when the homeowner moves out of the home or passes away. Interest and fees accumulate over time and are usually paid off with the sale of the home.
Tax Implications of Reverse Mortgages
The funds from a reverse mortgage are considered a loan advance and not taxable income. Interest on the loan is not deductible until it is actually paid, usually when the loan is repaid. If the loan is not repaid by selling the home, the outstanding balance becomes due upon the homeowner's death. Proceeds from selling the home should be used to repay the loan and any remaining equity will pass to the homeowner's estate. Consult with a tax advisor to understand the specific tax implications based on your situation.
Managing Tax Obligations with a Reverse Mortgage
Keep clear records of the loan disbursements and any repayments made. Stay informed about changes in tax laws that may impact your reverse mortgage. Consider setting aside funds to cover any potential tax obligations associated with the loan. Regularly review your financial situation and consult with a financial advisor to assess the impact on your taxes.