Key Takeaways
- Reverse mortgage money is not taxable income. Interest is deductible only when the loan is paid off, not as it accrues.
- You are still responsible for property taxes, insurance, and upkeep, and falling behind can put the loan at risk.
- The tax benefit may be limited since you must itemize deductions and meet IRS rules, so many seniors will not see an immediate tax break.
If you are considering a reverse mortgage, you may wonder how it affects your taxes, particularly regarding the deductibility of interest and its timing. Proceeds are generally tax-free, but interest is typically deductible only when the loan is repaid through a sale, refinance, or payoff, not annually. Understanding the timing, IRS limits, and reporting requirements can help you avoid surprises at tax time.
In this article. (Skip to...)
- Is interest tax-deductible
- When you can deduct interest
- Taxable income rules
- Who pays taxes
- IRS deduction limits
- Tax vs other equity options
- Claiming the interest deduction
- FAQs
Is reverse mortgage interest tax-deductible?
Yes, reverse mortgage interest is deductible only once actually paid, not when added to your balance. The IRS notes interest “isn’t deductible until the loan is paid off in full.”
With a traditional mortgage, you pay interest each month and deduct it that same year. A reverse mortgage works differently. The interest accumulates over time and is added to what you owe. Until you settle that balance, the IRS doesn’t consider the interest “paid.”
See if you qualify for a reverse mortgage. Start hereThe IRS generally allows mortgage interest deductions only for funds used to buy, build, or improve your home. Interest on amounts used for living expenses or medical bills is typically not deductible.
- Accrued interest: Gets added to your loan balance monthly but isn’t deductible until you pay it off.
- Paid interest: Becomes deductible when you settle the loan through a sale, refinance, or voluntary payment.
- How you used the funds: Interest on money spent on general expenses typically doesn’t qualify for a deduction.
When can you deduct interest on a reverse mortgage?
Since reverse mortgages do not require monthly payments, interest accrues and is not paid until the loan is settled. The timing of your payoff, sale, or voluntary payments determines when a deduction may apply.
See if you qualify for a reverse mortgage. Start here- At loan payoff or refinance: When you fully repay the reverse mortgage, the accumulated interest is considered paid in that tax year and may be deductible.
- When you sell the home: If the loan is repaid from sale proceeds, the interest portion may qualify for a deduction, as indicated on your closing statement.
- If you make voluntary interest payments: Any interest you choose to pay during the loan term may be deductible in the year paid.
Is reverse mortgage money considered taxable income?
No, reverse mortgage proceeds are not taxable income. The IRS treats these funds as loan advances, similar to a credit card cash advance or home equity loan. You are borrowing against your home’s value, not earning income.
See if you qualify for a reverse mortgage. Start hereThis applies whether you take a lump sum, receive monthly payments, or draw from a line of credit. These funds will not increase your tax bracket or the taxable portion of your Social Security benefits.
- Lump sum distributions: Not taxable
- Monthly payments: Not taxable
- Line of credit draws: Not taxable
Who pays the property taxes on a reverse mortgage?
You are responsible for paying property taxes, homeowners’ insurance, and any applicable HOA fees throughout the loan. These are required obligations, and falling behind can result in default or foreclosure. Some borrowers use reverse mortgage proceeds to cover these costs, and lenders may require a set-aside for taxes and insurance if affordability concerns arise.
Reverse mortgage capital gains tax and estate rules
Capital gains and inheritance rules for reverse mortgages affect both you and your heirs. Here is what to expect.
Capital gains when you sell the home
Selling a home with a reverse mortgage follows standard capital gains tax rules. If the property was your primary residence for at least two of the last five years, you may exclude up to $250,000 in gains, or $500,000 if married filing jointly. The reverse mortgage balance does not affect how gains are calculated; taxes are based on the difference between the sale price and your cost basis, including eligible improvements.
See if you qualify for a reverse mortgage. Start hereStepped-up basis for your heirs
When heirs inherit a home with a reverse mortgage, they typically receive a stepped-up basis equal to the home’s fair market value at the time of death. This can reduce or eliminate capital gains tax if the property is sold soon after. The loan’s nonrecourse structure means heirs are not personally responsible if the loan balance exceeds the home’s value; they can repay the loan, sell the home, or satisfy the debt through the property.
IRS limits on the reverse mortgage interest deduction
Several rules limit how much reverse mortgage interest you can deduct. Understanding these limits helps set realistic expectations.
Acquisition debt rules and home equity debt limits
Current tax law generally allows mortgage interest deductions only on acquisition debt, meaning funds used to buy, build, or substantially improve the home. If you use reverse mortgage proceeds for expenses such as medical bills, daily living costs, or debt repayment, the interest on those proceeds is usually not deductible. This rule limits eligibility for borrowers who use reverse mortgage funds for retirement income instead of home improvements.
See if you qualify for a reverse mortgage. Start hereThe IRS caps the amount of mortgage debt eligible for interest deductions. For loans issued after December 15, 2017, interest is deductible on up to $750,000 of qualified mortgage debt, or $375,000 if married filing separately. This limit applies to your total qualified mortgage debt across all loans on the property.
Itemizing vs. taking the standard deduction
You can deduct reverse mortgage interest only if you itemize deductions on Schedule A. Many older homeowners benefit more from the standard deduction and may not gain a tax advantage from deducting reverse mortgage interest. If your itemized deductions do not exceed the standard deduction, the interest deduction will not reduce your taxable income.
| Approach | What it means for reverse mortgage interest |
| Itemizing | Allows you to deduct qualifying reverse mortgage interest along with other itemized deductions |
| Standard deduction | Simpler to file but forfeits the reverse mortgage interest deduction entirely |
Before claiming this deduction, compare your total itemized deductions to the standard deduction to determine which option offers greater savings.
How reverse mortgage taxes compare to other home equity options
If you’re weighing a reverse mortgage against other ways to tap your equity, the tax differences can help inform your decision.
| Feature | Reverse Mortgage | HELOC | Home Equity Loan | Cash-Out Refinance |
| Interest deductible annually? | No (only at payoff) | Yes, if used for home improvements | Yes, if used for home improvements | Yes, if used for home improvements |
| Proceeds taxable? | No | No | No | No |
| Monthly payments required? | No | Yes | Yes | Yes |
- Reverse mortgage vs. HELOC tax treatment: HELOC interest may be deductible each year if the funds are used for qualifying home improvements. This provides an annual tax benefit, but HELOCs require monthly payments and may be frozen or reduced by the lender.
- Reverse mortgage vs. home equity loan tax treatment: Home equity loan interest is deductible as you pay it, but only if the funds are used for home improvements. These loans have fixed monthly payments, which may not fit all retirement budgets.
- Reverse mortgage vs. cash-out refinance tax treatment: Interest on the portion of a cash-out refinance used for home improvements is deductible annually. Unlike a reverse mortgage, this option replaces your mortgage and requires ongoing monthly payments.
How to claim your reverse mortgage interest deduction
If you have paid off your reverse mortgage and want to claim the interest deduction, follow these steps.
1. Track your interest payments and payoff amount
Keep records of any voluntary interest payments made during the loan term, as well as documentation of your final payoff. Your closing statement from the sale or refinance will show the breakdown of principal and interest.
Time to make a move? Let us find the right mortgage for you2. Request your Form 1098 from your servicer
After paying off your reverse mortgage, your loan servicer will issue Form 1098, which reports the interest paid. This form typically arrives in January following the year of payoff. If you do not receive it, contact your servicer directly.
3. Itemize deductions on Schedule A
To claim the deduction, file Schedule A with your Form 1040 and enter the mortgage interest on the appropriate line. This deduction is only beneficial if your total itemized deductions exceed the standard deduction.
4. Consult a tax professional for complex situations
Given the complexity of reverse mortgage tax rules, especially regarding fund usage, it is advisable to work with a CPA or tax advisor. This is particularly important if you used proceeds for mixed purposes or have other mortgage debt affecting your deduction limits.
Ready to evaluate the tax impact of a reverse mortgage?
Before proceeding, review how reverse mortgage tax rules apply to your situation. Interest may be deductible only when paid and if the funds were used for qualifying home improvements, while proceeds are generally tax-free. Consider your responsibility for property taxes, your expected length of stay in the home, and the loan’s impact on your estate and heirs. Consulting a tax professional, HUD-approved counselor, or qualified lender can help you understand the tax implications and determine if a reverse mortgage aligns with your financial and retirement goals.
FAQs about reverse mortgage tax deductions
Yes, certain closing costs, such as origination fees and mortgage insurance premiums, may be deductible when the loan is paid off. Consult a tax professional to determine which costs qualify in your case.
Financial expert Suze Orman has stated that reverse mortgages may be appropriate for some seniors, especially as a last resort or strategic planning tool. She advises borrowers to fully understand the costs, fees, and long-term implications before proceeding.
No, the IRS classifies reverse mortgage funds as loan advances rather than taxable income, so you don't report them on your 1040.
State tax treatment varies. Some states follow federal rules, while others have their own limitations or don't allow the deduction at all. Check with your state's tax authority or a local tax professional to understand whether you can claim a state-level deduction.
