Tax Implications of a Reverse Mortgage
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One of the things that reverse mortgages are frequently tied towards is tax implications. This is not just true for reverse mortgages, but really for any kind of loan that you can think of. There is general concern within the community of consumers that might be considering loans as to what those loans would do to them in terms of their taxes and answering this question allows you to take a big step towards understanding the big picture when it comes to any of the reverse mortgage loans that you might be considering.

Reverse Mortgages and the IRS

When you consider all of the different types of taxes in the United States today, the only one that can really be thought of in relation to a reverse mortgage loan is the federal income tax. The federal income tax is administered by an organization known as the Internal Revenue Service (IRS) and therefore their view of reverse mortgages is going to determine more than anything else exactly what tax implications there are when it comes to taking out this particular loan.

According to the homepage of the IRS, reverse mortgage loans are specifically considered by them to be a part of a larger financial category known as a loan advance. In other words, reverse mortgages are considered to be funds advanced against a particular loan agreement by the IRS. Because they are placed into that category, they can not be considered income. Therefore, for the purposes of the IRS and the federal income tax, reverse mortgages are not going to be considered taxable income.

Liquid Assets

In addition to taxable income, another question that frequently comes up is the question of whether or not reverse mortgage money is considered a liquid asset. If you’ve never heard the term before then chances are you don’t need to worry about it, but there are some tax categories where liquid assets play an important role.

Once again taking information from the horse’s mouth (i.e. the government’s website regarding this particular topic), we find that the category of loan advance is only going to be considered a liquid asset if you still have it when the calendar month changes hands. In other words, if you have a certain amount of your total reverse mortgage balance deposited into your account at the start of each month, the only way for you to avoid having that money considered a liquid asset is for all of the money to be spent by the end of the month.

Example

Here is a quick example just to let the two concepts discussed above sink in. If a person earns $6000 a year from their social security benefits as taxable income and gets another $6000 a year from their reverse mortgage, their total income for the year will be considered $6000; loan advances are not considered income. Additionally, if the $6000 worth of reverse mortgage money is split evenly into 12 payments of $500, then the person would need to make sure that they spend the $500 by the end of the month if they don’t want it to count as a liquid asset.

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