Is Reverse Mortgage Interest Always Tax Deductible?
June 20th, 2007
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We usually think of reverse mortgage interest as always being deductible, but that may not be the case.
With a reverse mortgage, there is typically nothing to pay back until the property is sold or the borrower passes away.
Because nothing is actually paid to the lender there’s no annual interest deduction for most borrowers since most borrowers use the “cash” method of accounting.
A more difficult issue is this: Is any or all of the interest deductible when it finally is paid?
Writing in the Nashua (NH) Telegraph, Scripps Howard columnist Kathleen Pender says:
“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.”
Pender also adds that “home equity debt is not deductible under the alternative minimum tax.” (See: Deducting a reverse mortgage dependent on methods of accounting, June 19, 2007)
Pender gets to an important point, the idea that mortgage interest is not always deductible regardless of how a home is financed. For specifics, speak with a CPA or other tax professional.
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