From the aftermath of World War II, the Cuban Missile Crisis, and the Vietnam War, to more recent events like the Great Recession and ongoing War on Terror, America’s Baby Boomer generation has lived through some trying times. And if you fall into this group, you’ve seen firsthand how these events have affected the economy.
Now weathering the volatile economic conditions stemming from the COVID-19 pandemic, many retired boomers are turning to the equity they’ve built up in their homes to create a sense of financial stability. As such, federally-insured Home Equity Conversion Mortgage (HECM) reverse mortgages have become a popular solution amongst this aging demographic.
But, like all loans and financial products, reverse mortgages come with their share of misconceptions and questions. So, let’s start by addressing one of the most common reverse mortgage questions we receive…
Are the proceeds from a reverse mortgage taxable?
No, the money received from a reverse mortgage loan is not taxable. While the money received may seem like income, it’s important to realize that the money itself is not being earned through work or investment activity. As such, the Internal Revenue Service (IRS) does not consider reverse mortgage proceeds to be income.
Since the money received from a reverse mortgage will eventually need to be repaid, the proceeds are simply considered loan advances. In other words, the proceeds aren’t taxed because the lender is essentially just returning the money you paid via mortgage payments in exchange for the equity you’ve built up in the home.
How does a reverse mortgage affect eligibility for Medicare, Social Security, and Government Assistance Programs?
Since Medicare and Social Security are age-based entitlement programs, they don’t account for your income or assets*. Regardless of your financial situation—including whether or not you have a reverse mortgage—you will remain eligible to receive benefits from these two programs.
Slightly more complex is eligibility for Government Assistance Programs like Medicaid and Supplemental Security Income (SSI). Since these programs are means-tested, both income and assets are considered for qualification. And while your reverse mortgage proceeds are not considered income, how you choose to receive them could determine whether or not they are viewed as an asset. For example, if you opt to receive your reverse mortgage proceeds in a one-time lump sum payment and keep them in a saving account, they could be deemed an asset—thus, making you ineligible for Medicaid and SSI. Learn more about reverse mortgage payment and fund disbursement options here.
Who pays property taxes on a reverse mortgage?
With a reverse mortgage, you continue to own your home and live in it as your primary residence. As such, you are responsible for your property taxes, insurance, and maintenance—including repairs. Failure to consistently pay these and maintain the condition of the property could result in the loan going into default, so you’ll want to be sure to plan ahead and keep up with these expenses.
And while traditional ‘”forward” mortgage borrowers can opt to use an escrow service to automatically manage property taxes and insurance payments, reverse mortgage borrowers may choose to use a similar service, known as the Life Expectancy Set Aside (LESA).
When it comes to considering a reverse mortgage, there are several stakeholders involved. Fortunately, Uncle Sam does not have to be one of them. More than half a million Americans have already made a reverse mortgage part of their financial plan. And with financial experts touting them as a smart strategy for accessing an alternate source of tax-free cash to avoid portfolio withdrawals, now may be the time for you to do the same.
* Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.