Tax Benefits of Reverse Mortgage

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You’ve likely heard of the reverse mortgage by now and wonder if it’s right for you. While many people see it as a way to age-in-place, there’s another major benefit most people overlook – the tax benefits.

If a majority of your assets are tied up in your home, the reverse mortgage can free up the cash and help you save money on income and estate taxes – music to most people in their retirement years ears!

How a Reverse Mortgage Works

Reverse mortgage is not a traditional mortgage that requires monthly payments. Instead, the lender pays you money from your equity. You can receive it as a lump sum, as installment payments, or a line of credit, whichever you prefer.

The money you receive accrues interest but no payments are due until you sell the house, move out, or pass away.

When you leave the home, you or your heirs use the proceeds of the sale to pay off the mortgage. This includes all interest charges that accrued on the money borrowed.

How you Save on Taxes

Let’s compare a reverse mortgage to selling the home. If you sold it, you’d pay capital gains taxes on any proceeds over the allowed exclusion which is $250,000 for single filers and $500,000 for married filing jointly couples.

If your capital gains exceed this limit, you could pay a hefty percentage in taxes. The maximum federal income tax rate right now is 23.8%.

If you instead took the money from the proceeds of a reverse mortgage, you’d owe no taxes on the money you withdraw and your heirs would benefit too. Rather than valuing the home based on the acquisition value when you bought the home and determining the capital gains on today’s earnings, the IRS allows heirs to step up the acquisition value to today’s value. If they sell the home rather quickly, there won’t be much room for capital gains, which means much lower taxes.

This can all sound confusing, but we’re here to help you every step of the way. If you’re trying to decide between a reverse mortgage or selling your home, let’s look at your options and see how it would affect your tax liability before you make any decisions.