How will the 2018 Tax Changes Affect Reverse Mortgages
Lately a lot of my clients have asked me, “how will the 2018 tax changes affect Reverse Mortgages?”. To answer the question I first must say, I am a Mortgage Broker and not an accountant so its important to consult a professional CPA for more accurate answers. Likewise, I am only licensed in the States of Utah and Colorado so my understanding of tax laws in other states is quite limited. However, below is some information I can give about how the 2018 tax changes may affect Reverse Mortgages in Utah or Colorado.
Interest Deduction & Reverse Mortgages
Let me begin by explaining how the interest deduction works with Reverse Mortgages. Tax laws allow homeowners to deduct a portion of the interest paid each year on the mortgages against their home. The key part of that sentence being “Interest PAID each year”. With Reverse Mortgages, the homeowner is not required to make payments as long as they live in the home as their primary residence, so interest is typically added to the balance of the home loan every month. The two scenarios this usually creates are:
- The homeowner chooses to never make a payment on the home. If they have not made a payment then they have not paid any mortgage interest and are not allowed a deduction on their taxes. When they pass away and the property is transferred to their estate, the estate will then refinance or sell the home to pay off the mortgage, effectively paying the interest all at once. The estate won’t get the full benefit of the interest paid but it will get to deduct a portion of that interest which could really help with estate taxes.
- If the homeowner sees a benefit in making payments either to store money in the Growth Line of Credit or just to pay down the mortgage balance. The payments made will first be applied to pay for Mortgage Insurance and Interest Charges and the homeowner will be allowed to deduct what was applied to the MI and Interest on their taxes at the end of that year.
The payment flexibility of Reverse Mortgages is what makes Reverse Mortgages such a powerful Financial Planning Tool. Let me give you an example of how this could be used.
Imagine you need to take a large chunk of cash out of your 401k. This could push you into a higher tax bracket and trigger a heavy Tax penalty. If you’ve had your Reverse Mortgage for a few years you could apply a large chunk of cash to your Reverse Mortgage. If you have the Growth Line of Credit version of the Reverse your payment reduces your loan balance, pays mortgage insurance and interest and is deductible on your taxes. The best part about doing this is:
- Every penny you put in can be pulled back out at any time.
- Money in your Growth line of Credit will grow by your growth rate which is currently around 4.5% for most loans, making more money available to you to access.
- Money you take from your Reverse Mortgage Line of Credit is non-taxable.
By employing the Reverse Mortgage benefits you’re able to shield yourself from the 2018 tax changes but keep money accessible if you need it. Seeing the full range of options is why it is important for you to plan your Reverse Mortgage with a Revers Mortgage Specialist.
Below are links to two articles I’ve found very interesting in regard to the 2018 Tax Changes.
If you or someone you love is ready to change their life with a Reverse Mortgage. Call me today for more information.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770