A reverse mortgage can be a helpful retirement tool. After all, these loans let you tap into your home equity without selling the house or taking on an extra monthly payment. Because these loans provide supplemental income—and you pay interest on the proceeds—you might wonder how reverse mortgages affect your taxes. Generally speaking, reverse mortgage income isn't considered taxable income and won't affect your Social Security or Medicare benefits.

What Is a Reverse Mortgage?

Most people who buy a home need a traditional mortgage (sometimes called a forward mortgage) to finance the purchase. You borrow money from a lender and pay down the loan each month while building equity in the home. 

Once you reach age 62 and have substantial equity in the home, you may be interested in a 澳洲幸运5官方开奖结果体彩网:reverse mortgage. This product generates a one-time lump sum from the lender, a set amount each month, or a 澳洲幸运5官方开奖结果体彩网:line of credit that you can use for living expenses, medical bills, and other purposes. However, instead of you making monthly payments to pay it back, the loan doesn❀’t bec𝕴ome due until you sell the home, move away, or die.

Tax Implications of a Reverse Mortgage

Reverse mortgages are attractive because they offer supplemental income that doesn’t have to be repaid until (potentially) much later. However, it’s important to consider the tax implications, so you won’t have any surprises come tax time. Here’s a rundown of what to expect. 

Reverse Mortgage Income

As far as the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) is concerned, the reverse mortgage payments that you receive are loan advances—not income. This means that you won’t owe any income taxes on the money you receive from your lender. This tax treatment is comparable to other types of loans that need to be repaid, including personal loans, 澳洲幸运5官方开奖结果体彩网:home equity loans, and 澳洲幸运5官方开奖结果体彩网:home equity l෴ines of credit (HELOCs). 

Social Security and Medicare Benefits

Because a reverse mortgage loan doesn’t count as income, that money generally won’t affect your 澳洲幸运5官方开奖结果体彩网:Social Security or Medicare benefits. However, it could affect your eligibility for 澳洲幸运5官方开奖结果体彩网:Supplemental Security Income (SSI), because any reverse mortgage funds that you retain (i.e., that you don’t spend right away) might count as assets. 

For example, say your reverse mortgage lender gives you $4,000, and you spend it the same month to pay medical bills. In that case, your SSI wouldn’t be affected. However, if you don’t use the money that month—and it sits in your bank account—then it would count as an asset, potentially affecting your eligibi💝lity for need-based benefits.  

Reverse Mortgage Interest

One of the benefits of buying a home is the home mortgage interest deduction. You can deduct mortgage interest on the first $750,000 of the loan, or $375,000 if you’re married and filing separately (if you took out the loan before Dec. 16, 2017, the limits are $1 million and $500,000). You deduct the interest the year that you pay it, thereby lowering your 澳洲幸运5官方开奖结果体彩网:taxable income for the year.  

Reverse mortgages don’t offer the same ta🙈x benefits. Instea๊d, with a reverse mortgage:  

• You don’t pay interest until the reverse mortgage becomes due when you (or your estate) repay the loan and interest in full.
• Any interest that accrues on a reverse mortgage is considered interest on 澳洲幸运5官方开奖结果体彩网:home equity debt, which isn’t usually deductible. 澳🐲洲幸运5官方开奖结果体彩网:Under the Tax Cuts an✃d Jobs Act (TCJA), you can deduct interest on home equity loans only if you use the money to buy, build, or substantially improve the home. You can’t deduct the interest if you use the loan proceeds to pay for something else—say, living expenses or medical bills.

Capital Gains Taxes

When you sell an investment, you typically owe capital gains taxes on the profits—the difference between the sales price and your 澳洲幸运5官方开奖结果体彩网:cost basis in the investment. If the asset is your 澳洲幸运5官方开奖结果体彩网:principal residence, the IRS allows a special exclusion: You can exclude up to $250,000 ($500,000 if you’re married filing jointly) of capital gains if you owned and lived in the home for at least two of the last five years.

澳洲幸运5官方开奖结果体彩网:Capital gains can get tricky when reverse mortgages are involved. Here’s why: You (or your estate) can’t owe more than the home’s value when the loan becomes due and you sell the house. In other wo🌳rds, if your reverse mortgage balance is greater than the home’s sale price, the difference is forgiven. However, that amount counts as additional sale proceeds♓ at tax time.  

Here’s an example: Say you paid $200,000 for a home decades ago🎃 and sell it today for $450,000. Even though you have $250,000 of capital gain🌞s, you won’t owe taxes on that amount because of the capital gains exclusion. But what happens if you have a reverse mortgage on the home and currently owe $500,000? In that case, $50,000 of the loan would be forgiven—remember that you can’t owe more than the home’s value when the loan is due.

However, that $50,000 gets added to the $250,000 gain from home 澳洲幸运5官方开奖结果体彩网:appreciation. Thus, your capital gains taxes are now based on a $300,000 gain. You can still excl꧑ude the first $250,000, but you owe capital gains tax on the remaining $50,000—even though you didn’t make any money on the sale.  

The Bottom Line

Understanding the tax implications of reverse mortgages can help you avoid any surprises at tax time. When in doubt, speak with your 澳洲幸运5官方开奖结果体彩网:financial advisor or a tax specialist who can answer any questions that you might have. While lenders generally charge the same 澳洲幸运5官方开奖结果体彩网:mortgage insurance premiums, be sure to shop around: The other loan costs, such as 澳洲幸运5官方开奖结果体彩网:origination and 澳洲幸运5官方开奖结果体彩网:servicing fees and interest rates, tend to vary by lender.