Question:

Can you avoid tax on accrued interest for reverse mortgages?

Answer:

If you have a reverse mortgage, have taken a lump sum in advance and have a big line of credit, you are probably wondering if you can list the accrued interest on the tax returns, thus avoiding tax on accrued interest on the reverse mortgage According to the IRS, accrued interest on a senior citizen reverse mortgage will not be tax-deductible until you actually pay the lender. This happens in general when the reverse mortgage amortizes in full, or when the owner of the house sells the property or moves out permanently.

Nevertheless, your mortgage company may agree to accept annual payment of reverse mortgage interest and in that case payment would qualify as itemized tax deduction on Schedule A rather than as tax on accrued interest for reverse mortgages.

However, you should consult a tax advisor in person to make sure any assumptions regarding tax exempt accrued interest on a reverse mortgage are going to work out.

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