Reverse Mortgages - 2021 - CPA Clinics
If you are unwilling or unable to sell your home, and need additional income during retirement, you may benefit from a reverse mortgage. Payments received on a reverse mortgage are not taxable to you.
Tax-free income. A reverse mortgage can be used to generate tax-free income. You can convert the equity built up inside your home into cash without having to sell the home. See Example #1, later.
Eliminate mortgage payments. A reverse mortgage can be used to pay off an existing mortgage, thereby reducing expenses. See Example #2, later. This may benefit a person who is considering retirement but does not currently have enough money to retire on. See Example #3, later.
Home improvements. A reverse mortgage can be used for home improvements and repairs. By making changes to the home, you can continue to live in the home rather than sell and move to a different location. This can be especially important to a person who wishes to keep the home in the family or have an emotional attachment to the home. See Example #4, later.
– Be 62 years of age or older,
– Own the property outright or have a small mortgage balance,
– Occupy the property as his or her principal residence, and
– Not be delinquent on any federal debt if it is a federally insured reverse mortgage.
– Single-family home.
– Multiple-unit home of 1–4 units with the eligible unit being occupied by the borrower.
– HUD-approved condominium.
– Manufactured home that meets FHA requirements.
The examples are for illustration purposes only. The actual amount of payment, line of credit, or lump sum depends on the location, appraisal value, age of the borrower and current interest rate. Only a mortgage contract can guarantee a payment, term, or interest rate.
Example #1: Louise, a single taxpayer age 64, owns her home. Her home is worth $175,000 and she owns it outright. Her monthly sources of income include Social Security of $1,250 and a pension of $1,400. She needs $3,000 per month to live on and has no other assets to generate income. Louise takes a reverse mortgage and receives a monthly payment of $505. The annual income from the reverse mortgage of $6,060 is not taxable. In addition, the reverse mortgage payment does not cause any of her Social Security benefits to be taxable.
