Is A Reverse Mortgage Tax-Free Income?

I saw a headline that got my attention:

“Reverse Mortgages – A Tax Free Income for Senior Citizens”

Huh?

Whatever a reverse mortgage is, it isn’t tax-free income.

Income is something earned from land, labor, capital or entrepreneurial activity.

Money from a reverse mortgage is not income. Whether paid in a lump sum or over time it’s just the proceeds from a loan.

The reason cash from a reverse mortgage is “tax free” is merely because it’s not earned income. It is the principal balance of a loan, money that must ultimately be repaid — with interest. In fact, a reverse mortgage is no different than any other mortgage. For instance, if you finance your property with an FHA loan the principal balance is also not taxed.

There are various reasons why reverse mortgages may be attractive to given borrowers, but “tax-free income” isn’t one of them and can’t be one of them. If you want tax-free income, speak with a qualified investment advisor about bonds and other forms of investment instruments.

This entry was posted on Thursday, July 26th, 2007 at 1:36 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.