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2010-10-21 09:03:30
How does a Reverse Mortgage affect taxes?

Your taxes are not affected. The payment that you receive on a reverse mortgage are often referred to erroneously as tax-free income. There have been advertisements that talk about reverse mortgages and tax-free income. The fact of the matter is they are not income at all. It is your money. If you have equity in your home and you could pull that equity out by borrowing it, that is principal, so it is not income -- it is your money and it is sort of like if you had a savings account with $100,000 in it and took a $10,000 withdrawal. No one would call that tax-free income.

The taxation of the loan is a little bit tricky from the deduction side. Because you are not making payments, the borrowers will not get any tax deductions until the cash is actually taken. So imagine a couple has this loan for six or seven years. During those years, they are not getting any deductions. Then they move out of the house and pay the loan back, all of the interest that accrued during the seven years would now be a deduction that would be available to them.

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