What You Need to Know About Reverse Mortgages and Taxes 

A reverse mortgage is a great option for tapping into your home’s equity in your retirement. It allows homeowners to eliminate their current monthly mortgage payments and potentially increase their monthly income at the same time.  

Since reverse mortgage loans can include additional income and interest on money borrowed, you may have questions about the tax implications.  

In this article, we will cover everything you need to know about reverse mortgages and taxes. 

Reverse Mortgages and Taxes 

What is a Reverse Mortgage? 

Before diving into reverse mortgages and taxes, let’s first discuss what a reverse mortgage is and who it is for.  

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).  

A HECM reverse mortgage is a loan just like a traditional mortgage, but it comes with some very specific qualifications that are different from a forward mortgage. 

In order to qualify, you must meet the following reverse mortgage requirements:  

• At least one homeowner must be 62 or older 
• The home must be your primary residence  
• The home must be in good, maintained condition 
• You typically need to have a minimum of 50% equity, but qualifying is primarily based on your age and equity you have in your home 

• The home needs to be a single-family home, two to four multi-family unit in which you occupy one of the units, or be one of the other approved property types 
• The homeowners must complete a counseling session with a counselor approved by the U.S. Department of Housing and Urban Development (HUD) 

When homeowners take out a reverse mortgage, it will replace their current mortgage, which means that it will eliminate the monthly payments that go along with it. For any remaining equity, homeowners have the option to receive the funds as a lump sum, a line of credit, monthly payments, or a combination of the three.  

Does a Reverse Mortgage Count as Income?  

In most cases, homeowners who take out a reverse mortgage receive their funds as a lump sum, a line of credit, or monthly payments to supplement their income.  

However, a reverse mortgage is a loan, which means it is not technically considered income by the Internal Revenue Service (IRS) since it will need to be paid back.  

How Capital Gains Taxes May Affect a Reverse Mortgage 

Capital Gains taxes are not typically owed on a primary residence, but there is a unique way they can affect those with reverse mortgages. This is actually related to one of the protections that comes with a reverse mortgage.  

Since reverse mortgages are backed by the FHA, this means that you will never owe more on the home than what it is worth. If you do owe more, that additional amount is forgiven debt. The IRS categorizes forgiven debt as income since it’s money that does not have to be paid back.  

Borrowers will have to pay capital gains taxes on the amount that is forgiven.  

Next Steps 

If you have more questions about reverse mortgages, we have you covered. Check out our complete guide on reverse mortgages by going here.  

If you are ready to move forward, check out our list of recommended reverse mortgage lenders here.