As a HECM counselor, I speak with seniors all the time who are concerned about not being able to deduct their loans interest from their taxes every year. Even though they are reducing their expenses by doing the HECM Reverse Mortgage, many seniors still count on that deduction every year. Why can’t the seniors deduct the Reverse Mortgage’s interest from their taxes every year? And are there any ways around this without having to avoid the Reverse Mortgage entirely?
(If no outside response is given, answers will be posted within 3 business days.)
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, allows homeowners aged 62 and older to convert a portion of their home equity into cash. Unlike traditional mortgages, borrowers don’t make monthly payments; instead, repayment occurs when the borrower sells the home, moves out permanently, or passes away. While this financial tool can provide retirees with extra income, one key concern often arises—how does a reverse mortgage affect interest deductions?
How Interest Works in a HECM
In a reverse mortgage, interest accrues on the outstanding loan balance over time. Since no monthly payments are made, the interest keeps adding up until the loan is repaid. Importantly, interest is not deductible annually because borrowers aren’t making regular interest payments. Instead, interest deductions are only available once the loan is actually paid off.
IRS Rules on Deduction
According to IRS guidelines, mortgage interest can be deducted only when it is paid. For HECMs, this usually happens when:
The borrower sells the home and repays the loan.
The borrower (or their heirs) repays the loan after the borrower’s death.
Only at that point can the accrued interest potentially be deducted.
Limitations on Deduction
Qualified residence rules apply: The property must qualify as a primary or secondary residence.
Limit on loan balance: The IRS sets limits on the amount of mortgage debt eligible for interest deductions.
Beneficiaries’ responsibility: If heirs repay the loan, they may not be able to deduct the interest unless they are legally liable for the mortgage.
Key Takeaway
While HECM reverse mortgages can provide financial relief during retirement, homeowners should be aware that interest deductions don’t apply until repayment occurs. This makes tax planning essential. Consulting with a tax professional before opting for a reverse mortgage can help maximize benefits and avoid surprises.
