Taxes are notoriously complicated and nuanced, so it’s natural to have questions, especially when making a major financial decision.
It’sTaxSeason:Top Reverse M ortgage Tax-Related FAQs
‘Tisthe seasonfortaxes!Are youfulyprepared forTaxDay?April18 wilbe here before youknow it… Taxesare notoriouslycom plicated and nuanced,so it’snaturalto have questions,especialywhen m aking a m ajorf inancialdecision.Everyyearduring taxseason,ourteam atLongbridge Financialreceivesan inf luxof questionsfrom both ourcustom ersand busines partnersalike abouthow taxescan be im pacted bya reverse mortgage . Are you considering using areverse m ortgage to help you live am ore f inancialysecure retirem ent?Orare you alreadyaborowerwho isenjoying greaterpeace ofmind?Ineithercase,youmayhave yourownquestions aboutthe taxim plicationsofthe loan. W ith hisin m ind,we’ve gathered som e ofthe top reverse m ortgage tax-related questionsand theiranswers. These are agreatstarting pointforthose exploring reverse m ortgage,butwe alwaysrecom m end you consult yourCPA ortaxprofes ionalbefore m aking anym ajorf inancialdecisions. Backto Basics Before we dive into tax-specif icdetails,let’scoversom e reverse m ortgage basics.Reverse m ortgage loans, specif icalydesigned forhomeownersaged 62 and above,workbyalowing eligible homeownersto converta portion oftheirhom e’sequityinto cash withouthaving to selthe hom e orm ake regularm onthlym ortgage payments. 1 Unlike atraditionalm ortgage where the borowerstartsm aking paym entson the loan im m ediately, reverse mortgage borowersdo nothave to repayfundsreceived untilafterthe f inalborowerno longerlivesin the hom e. Reverse mortgage loanproceedscanbe used howeveryou choose :paybils,m ake hom e m odif ications,orsave up foremergencyexpenses.Anothercommonwayyoucanuse theirreverse mortgage proceedsisto reduce yourtaxable incom e.Using incom e tax-free 2 reverse m ortgage fundsto coverexpensesand avoid taking any taxable withdrawalsfrom a401(k)orotherretirem entplan can alow you to decrease taxable incom e.Thiscan also help yourretirem entac ountscontinue to grow asyou continue to delaydrawing funds. Dive Into the Details It’sim portantto consideralthe waysreverse m ortgage loanscan im pactyourf inances,so in the spiritoftax season,let’stalkthrough som e ofthe top tax-related questionsand answersaboutreverse m ortgagesthatyou need to know: Q:Do reversem ortgageproceedscountasincom e? A:Simplyput,no.W hile reverse mortgage proceedscanbe considered anincome supplementinretirement,the InternalRevenue Service (IRS)doesnotclas ifyloan proceeds– ofanykind – asincom e. 2 Thism eansthatthe fundsreceived from areverse m ortgage are nottaxable asincom e because theyare sim plyaloan advance. 3 Q:Isreverse m ortgage interesttaxdeductible? A:Like atraditionalm ortgage,som e ofthe costsincured when geting areverse m ortgage are taxdeductible. An exam ple ofcoststhatcan be claim ed are reverse m ortgage origination feesand anybrokerfees.In addition, anyinterestpaym entsyou m ake are also taxdeductible. Reverse m ortgage interestcan be deducted onlyifthe m oneywasused to buy,build,orsubstantialyim prove the home. 4 Forexam ple,ifyou used the loan proceedsto rem odelabathroom ,you could deductthe interest,but onlywhen you eventualypayof f the loan.Alternatively,ifyou use the fundsto payforbasicliving expensesor m edicalbils,you cannotdeductthe interest. Q:W ilIreceive aForm 1098 (m ortgage intereststatem ent)from m ylender? A:Ifyoumake paymentsonyourmortgage interesttotaling $600 ormore inataxyear,the lenderisrequired to m ailyou a Form 1098 . 5 Mostreverse mortgage loansdo notrequire borowersto make prepaymentsthatequal $600 in m ortgage interestpaid back,thusthe 1098 doesnotapplyin m ostcases. W ith thatsaid,due to the recentref inancing boom ,reverse m ortgagesthathave been paid in fulare highlylikely to have exceeded $600 in interestpaid,therefore requiring a1098.Ifthisappliesto you,your1098 should have beenmailed bynow.Notsure?Reach outto yourlenderortaxprofes ionaldirectlyto f ind out. The mortgage interestdeductionisanitemized deductionand mustbe itemized onSchedule A and submited with yourForm 1040 taxreturn when you f ile. 6 You can’tclaim the standard deduction foryourf ilng statusifyou electto item ize,so thiscould m ean paying taxon m ore incom e than you have to,ifthe totalofyouritem ized deductionsdoesn’texceed the standard deduction you’re entitled to forthe year. Q:Can m ygovernm entbenef itsbeaf fected? A:Because reverse m ortgage proceedsare notconsidered incom e bythe IRS,SocialSecurityand M edicare benef itsgeneralywon’tbe af fected astheyare notneeds-based program s.However,loan proceedsare considered an as etforneeds-based benef its,like Medicaid ,and could potentialydisqualifyyou ifyou don’t spend the moneyinthe monthyoureceive it. 7 W e recom m end contacting yourf inancialadvisorto discus the potentialim pact(ifany)on yourgovernm entbenef its. Q:Could Iowe capitalgainstaxes? A:Capitalgainstaxesare typicalyowed on the prof itsofthe sale ofan investm ent.Ifthe investm entisaprincipal residence,the IRS of fersaspecialexclusion.You can exclude up to $250,000 (or$500,000 ifyou’re m aried and f ilng jointly)ofcapitalgainsifyou have owned and lived in the hom e foratleasttwo ofthe lastf ive years. 8 W ith areverse m ortgage,capitalgainsare les sim ple.Because aborowerorheirscan’towe m ore than the hom e isworth,when the reverse m ortgage becom esdue,ifthe loan balance isgreaterthan the hom e’ssale price,the dif ference isforgiven. 9 However,thatdif ference wilcountasadditionalsale proceedsattaxtim e. Q:W hataboutpropertytaxes? A:Like anym ortgage,with areverse m ortgage,you are responsible forpropertytaxes,hom eownersinsurance, and hom e m aintenance.To ensure you can m eetthese responsibilties,the FederalHousing Adm inistration (FHA) requiresyou to com plete af inancialas es m entdesigned to determ ine yourabiltyto fulf ilalobligationspriorto obtaining the loan. Forthose who m ayhave lim ited incom e orbruised credit,loan insurance in the form ofa Life Expectancy Set-Aside(LESA) m aybe required.A LESA isapooloffundswithheld from the totalavailable reverse m ortgage proceedsspecif icalyto payforpropertytaxesand insurance chargesthroughoutthe estim ated life ofthe loan, sim ilarto atraditionalm ortgage escrow ac ount.LESA fundsare setaside are notsubjectto interestor m ortgage insurance prem ium suntilthey’ve been paid toward yourpropertyinsurance and taxes. KeyConcepts Let’sreview som e ofthe m ain take awaysfrom ourFAQs!Like anyloan,proceedsfrom areverse m ortgage are notsubjectto incom e tax,however,othertypesoftaxescan com e due.W hile theyare notconsidered incom e, reverse mortgage loanproceedsare considered anas etwhenitcomesto Medicaid and otherneeds-based program s.Because each borower’scase isunique,it’salwaysbestto consultyourown CPA ortaxprofes ional to learnhow yourowntaxesmaybe impacted. W ith the recentlending lim itincrease and other econom ictrends in m ind,now m ightbe the perfecttim e to see if areverse m ortgage loan isthe rightm ove foryourretirem ent.AtLongbridge Financial,ourteam ofexpertsis readyto help! W e’recom m ited to onlyrecom m ending areverse m ortgage ifit’sthe rightf itforyourretirem ent. W e know everyindividualscenario isunique,so we’ltake the tim e to getto know you and yourf inancialgoalsas we review youroptions.Restas ured,ifwe everfeelthatareverse m ortgage isnotrightforyou,we’ltelyou. Notal endersm ake thispledge.To getstarted,contactyourLongbrdge FinancialReverse M ortgage Consultant.
1.Realestate taxes,hom eownersinsurance,and propertym aintenance required. 2.Consultaf inancialadvisorand appropriate governm entagenciesforanyef fecton taxesorgovernm entbenef its. 3.htps:/www.irs.gov/faqs/other/for-senior-taxpayers/for-senior-taxpayers 4.htps:/www.irs.gov/newsroom /interest-on-hom e-equity-loans-often-stil-deductible-under-new-law 5.htps:/www.irs.gov/form s-pubs/about-form -1098 6.htps:/www.irs.gov/publications/p936#en_US_2021_publink1000229930 7.htps:/www.thebalancem oney.com /tax-im plications-of-reverse-m ortgages-5322891 8.htps:/www.irs.gov/taxtopics/tc701 9.htps:/f iles.consum erf inance.gov/f/docum ents/cfpb_reverse-m ortgage-discus ion-guide.pdf
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©2023 Longbridge Financial,LLC NM LS# 957935 (www.nm lsconsum erac es .org).Longbridge Financial,LLC isheadquartered at1InternationalBlvd.,Suite 900,M ahwah,New Jersey 07495.Longbridge conductsbusines inthe folowing states:AK (AlaskaMortgage Broker/LenderLicense No.AK 957935),AL,AR,AZ (BL0930082),CA (CA Loansmade oraranged pursuantto aCaliforniaFinance LendersLaw license 60DBO87825)and (Licensed bythe Departm entofFinancialProtection and Innovation underthe CaliforniaResidentialM ortgage Lending Act4131245),CO (Regulated bythe Division ofRealEstate;to checkon the license statusofyourm ortgage loan originator,visithtps:/apps.colorado.gov/dre/licensing/),CT,DC (DistrictofColum biaM ortgage DualAuthorityLicense No.M LB057935),DE,FL,GA (GeorgiaM ortgage LenderLicense/Registration No.44082),HawaiM ortgage Loan Originator Com panyLicense:HI-957935,HI(M ortgage ServicerLicense M S241),ID,IL(IlinoisResidentialM ortgage Licensee;IlinoisCom m is ionerofBankscan be reached at100 W estRandolph, 9th Floor,Chicago,Ilinois60601,312-814-4500),IN,IA,KS (KansasLicensed M ortgage Com panyM C3030747),KY,LA,M A (M as achusetsLenderLicense M L957935),M A (Debt ColectorLicense DC957935),M D,M E (957935),M I,M N,M O (435 NicholsRoad,Suite 200,KansasCity,M is ouri6412),M S (Licensed bythe M is is ippiDepartm entofBanking and ConsumerFinance),MT,NC (4601ParkRoad,Suite 500,Charlote,NC 28209 28217L-162652),ND,NE,NH (Licensed bythe New Hampshire Banking Department),NJ(Licensed bythe NJDepartm entofBanking and Insurance),NJRM LA-Licensed M ortgage ServicerRegistration (Licensed bythe NJDepartm entofBanking and Insurance),NM ,NV,NY (Licensed M ortgage Banker-NYS Departm entofFinancialServicesLM B 109648),ND,OH (RM .850245.009),OK,OR (M L-5148,M S-191),PA (Licensed bythe PennsylvaniaDepartm entofBanking 40207& 67479),RI(Rhode Island Lender),SC,SD,TN,TX (Mortgage BankerRegistration,945 BunkerHilRoad,Suite #500,Houston,TX 77024),UT,VA (Licensed bythe VirginiaState CorporationCommis ionMC 5817),VT (VermontLenderLicense No.6710),W A (ConsumerLoanCompanyLicense No. CL-957935),W V,W I,W Y (M ortgage Lender/BrokerLicense No.2947).Longbridge Financial,LLC isan equalopportunitylender.These m aterialsare not from HUD orFHA,and werenotapproved byHUD oranygovernmentagency.
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