Facts About Reverse Mortgages In Canada On Taxes & Pensions
All money that you receive for a Canadian Reverse Mortgage is tax-free.
Canadian reverse mortgages do NOT affect any Old Age Security or Guaranteed Income Supplement government benefits you may already be receiving.
You make absolutely NO monthly repayments while you or your spouse live in your home. Other mortgage products require you to make a monthly payment. With a Canadian Reverse Mortgage you do not have to make any mortgage payments.
Who Is A Bad Candidate For A Reverse Mortgage
There are plenty of signs that a reverse mortgage is not a good choice:
- If youre planning to move Remember that you need a long runway to make paying all the closing costs, mortgage insurance premiums and other fees worth it. So, if you think you might want to relocate to a new destination or downsize to a smaller place anytime soon, steer clear of a reverse mortgage.
- If you might need to move due to health issues A reverse mortgage requires you to live in the home, which means that relocating to a nursing home or any kind of assisted living arrangement could result in needing to pay back the loan. If youve been concerned about health issues, its probably wise to avoid a reverse mortgage.
- If youre struggling to cover the other costs of your home One of the key components of a reverse mortgage is your ability to pay your property taxes and homeowners insurance. If youve faced challenges coming up with the cash for these essential costs, adding to your debt should not be on the table.
Reverse Mortgage Tax Deductions
Disclaimer: Alpha Mortgage Reverse Division is not a tax advisor and does not offer tax advice. We recommend consumers consult with licensed tax professionals regarding potential tax deductions related to reverse mortgages. The information on this page may have changed since it was posted. Please verify any of the topics below with your tax advisor.
When it comes to tax deductions, a reverse mortgage offers similar benefits as a traditional mortgage. However, there may be some key differences. Namely, the accrued interest in a reverse mortgage may only be deductible after it is paid. This may be true for a traditional mortgage as well, but since reverse mortgage borrowers generally do not make payments on their loan, the tax deduction may be little more difficult to get.
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Is Reverse Mortgage Interest Tax
I think a large portion of my posts begin with some variation of the phrase, There is a great deal of confusion surrounding aspect xx of reverse mortgages. While this certainly speaks to a lack of originality in my part, lets face it, reverse mortgages are complicated. There are a lot of aspects which seem superficially similar to conventional mortgages, but are actually quite different. Reverse mortgage interest is one such aspect.
Its not the the calculation of reverse mortgage interest which is complicated. Just like any other loan, interest is calculated on the outstanding balance of the loan. Whether you take the proceeds from a reverse mortgage as an upfront payment or in installments, interest charges will be calculated monthly based primarily on the amount of money that has been withdrawn to date. However, since you arent expect to make payments to the lender with a reverse mortgage during the life of the loan, the loan balance will actually increase over time, such that you are not only paying interest on the principal, but also on the accrued interest. In this sense, a reverse mortgage can be thought of as a kind of negatively amortizing mortgage.
Pro #: You May Lower Your Current Mortgage Interest Rate
Typically, this is the main motivator behind refinancing. If you originally got your mortgage when interest rates were high, and youve never refinanced, you may be paying more than you need to. Taking the time to apply for a new loan at a lower rate could save you hundreds of dollars a month.
For example, if you have a $200,000 loan and are paying 7 percent interest on a 30-year fixed-rate mortgage, your total monthly interest and principal payments are probably about $1,331. If you refinanced at 3.8 percent, your monthly payment could be reduced to $932. Thats a monthly savings of $399!
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How To Claim The Mortgage Interest Deduction
Youll need to take the following steps.
1. Look in your mailbox for Form 1098. Your mortgage lender sends you a Form 1098 in January or early February. It details how much you paid in mortgage interest and points during the tax year. Your lender sends a copy of that 1098 to the IRS, which will try to match it up to what you report on your tax return.
You will get a 1098 if you paid $600 or more of mortgage interest during the year to the lender. You may also be able to get year-to-date mortgage interest information from your lenders monthly bank statements.
2. Keep good records. The good news is that you may be able to deduct mortgage interest in the situations below under certain circumstances:
- You were a co-op apartment owner.
- You rented out part of your home.
- The home was a timeshare.
- Part of the house was under construction during the year.
- You used part of the mortgage proceeds to pay down debt, invest in a business or do something unrelated to buying a house.
- Your home was destroyed during the year.
- You were divorced or separated and you or your ex has to pay the mortgage on a home you both own .
- You and someone who is not your spouse were liable for and paid mortgage interest on your house
The bad news is that the rules get more complex. Check IRS Publication 936 for the details, or consult a qualified tax pro. Be sure to keep records of the square footage involved, as well as what income and expenses are attributable to certain parts of the house.
Deducting Reverse Mortgage Interest Payments
In the case of a reverse mortgage, it is still indebtedness against a primary residence, which means the same rules apply to deduct reverse mortgage interest, including the determination of whether the loan balance will be classified as acquisition debt or home equity indebtedness depends on how the money is used. Thus, if the borrower takes out an upfront lump-sum reverse mortgage to refinance other debt, its home equity indebtedness if the reverse mortgage is used to buy a new retirement home, or to make home modifications on your existing home for your retirement, it can be acquisition debt.
Fortunately, a new mortgage that is simply refinancing of existing acquisition debt continues to count as acquisition debt as well, which means a reverse mortgage used to refinance a traditional mortgage can also be acquisition debt . Though notably, even if the reverse mortgage is acquisition debt and its interest is deductible as such, technically the interest on the interest that may accrue in a negatively amortizing reverse mortgage should be treated as home equity indebtedness .
Instead, the cumulative loan interest is often repaid when the reverse mortgage finally terminates either because the borrower ceased to use his/her the property as his/her primary residence, decided to repay the loan, or in many cases because he/she passed away and the property is being liquidated by the estate or heirs in order to repay the loan.
Recommended Reading: Why Do Mortgage Need Bank Statements
Reverse Mortgage Tax Deductions The Basics
1. Typically, you can only deduct the interest that youve paid. So, if you have not made any payments toward your accrued mortgage interest, then you may not have anything to deduct. Even if you dont pay anything toward the principal balance, if you manage to pay the interest every year, you may be able to get the tax deduction.
2. A second thing to keep in mind is that deducting your reverse loan interest may be allowed on only certain portions of your mortgage proceeds. In other words, the deductible interest may depend on what you used the payments for.
According to the Journal of Financial Planning, a taxpayer may deduct interest paid on only certain portions of the loan proceeds such as portions used to construct, acquire or substantially improve the mortgaged residence.
Additionally, interest accrued and paid on portions of the mortgage proceeds that go toward refinancing previously existing acquisition indebtedness may also be deductible. This is where things get a little more complicated, so be sure to go over these points with your tax professional.
3. Typically, mortgage insurance premiums are not tax deductible with reverse mortgages. However, there may be some instances where a portion of the mortgage insurance premium may be deductible under certain circumstances. Check with your tax professional for details.
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5. Some fees may be tax deductible on a reverse mortgage, such as the origination and broker fees.
Other Taxable Situations With Reverse Mortgages
Taking out a reverse mortgage wont spare you from paying property taxes. You still hold title to your home, so your county or municipal authority will continue to assess property taxes against you personally, not your lender. And not paying them could effectively result in foreclosure. Your lender may call the entire reverse mortgage balance due. Your homes equity secures your loan, and your lender wont want to lose that collateral to your local taxing authority if you dont pay.
Capital gains tax may come due as well if you or your heirs should sell the home to pay off the mortgage. You could owe capital gains tax on the difference between what you initially paid for and invested into the property and the amount of the sale. But that amount would have to be rather significant before a capital gains tax kicks in. The IRS offers a home-sales exclusion if you owned and used your home as your primary residence for at least two of the last five years. You can realize up to $250,000 in gains as of 2022 without paying a tax if youre single, or $500,000 if youre married and file a joint tax return with your spouse.
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Learn More About How People Are Using Home Equity Conversion Mortgages For Purchasing Homes:
Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.
Copyright© 2022. All Rights Reserved. Equal Housing Lender. Alpha Mortgage Corporation NMLS #93265. Main Office: 1320 Airlie Road | Wilmington, NC 28403 910.256.8999. Alpha Mortgage Corporation is licensed in North Carolina , Virginia , South Carolina , Florida , and Georgia . NMLS #93265 Alpha Mortgage Corporation is licensed by Virginia State Corporation Commission as MC-4927 | Not all applicants will qualify. Please meet with a licensed loan originator for more information . Rates, fees, terms, and programs are subject to change without notice. Not all loans, loan sizes, or products may apply. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet loan-to-value requirements, and final credit approval. When refinancing your home mortgage, while your interest rate, monthly payment or loan type may decrease or change, your total finance charges may be higher over the life of the loan as a result of the refinancing. Approvals are subject to underwriting and program guidelines and are subject to change without notice.
Irc Section 121 Exclusion Of Gain From Sale Of Principal Residence
This section covers profit when the home is sold for more than its purchase price plus home improvements. This rule is sometimes referred to as the 250/500 rule because those are the limits of profit on which no taxes are due.
If youve owned and lived in a home for two of the five years before the sale, then, for single filers, up to $250,000 of profit is tax free. And, for those who are filing a joint return, $500,000 is tax free. You only pay taxes on the profit from selling your home on the portion that is above the Section 121 threshold. Example one: a single filer who realizes $300,000 profit would pay taxes on = $50k of profit.
Example two: a married couple buys a home in the early 80s for $200,000. Over the years, they spend $50,000 in capital improvements making their adjusted cost basis $250,000. Thirty years later they sell the home for $740,000 . They would not owe taxes because their profit = $490,000, which is under the $500k tax-free limit for a married couple filing jointly.
Many people do not know that they can sell an existing home and buy a new home with a reverse mortgage. The advantage is they dont use up all their sale proceeds when they buy the next house.
Back to the example two above: the seller had net proceeds of $490,000. Perhaps the house they sold no longer fit it was too big, the kids are gone, they dont like the location, they need a downstairs bedroom, etc. Now theyd like to buy a townhome for approximately $500,000.
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How The Mortgage Interest Deduction Works In 2021
The mortgage interest deduction allows you to reduce your taxable income by the amount of money youve paid in mortgage interest during the year. So if you have a mortgage, keep good records the interest youre paying on your home loan could help cut your tax bill.
As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.
For example, if you got an $800,000 mortgage to buy a house in 2017, and you paid $25,000 in interest on that loan during 2020, you probably can deduct all $25,000 of that mortgage interest on your tax return. However, if you got an $800,000 mortgage in 2020, that deduction might be a little smaller. Thats because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.
Theres an exception to that Dec. 15, 2017, cutoff: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained prior to Dec. 16, 2017.
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IRS Publication 936 has all the details, but heres the list in a nutshell.
Interest on a mortgage for your main home
Prepayment penalties
How The Mortgage Interest Deduction Works In 2022
The mortgage interest deduction allows you to reduce your taxable income by the amount of money youve paid in mortgage interest during the year. So if you have a mortgage, keep good records the interest youre paying on your home loan could help cut your tax bill.
As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.
For example, if you got an $800,000 mortgage to buy a house in 2017, and you paid $25,000 in interest on that loan during 2021, you probably can deduct all $25,000 of that mortgage interest on your tax return. However, if you got an $800,000 mortgage in 2021, that deduction might be a little smaller. Thats because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.
Theres an exception to that Dec. 15, 2017, cutoff: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained prior to Dec. 16, 2017.
Want us to do it for you?
Get the app to see your net worth anytime, at a glance.
IRS Publication 936 has all the details, but heres the list in a nutshell.
Interest on a mortgage for your main home
Prepayment penalties
Also Check: How Much Conventional Mortgage Can I Afford
No Monthly Mortgage Payments
Unlike a regular mortgage, there are no regular mortgage payments of principal and interest. Reverse mortgage agreements provide that no repayments are due until the homeowner dies, or the house is sold or abandoned. Unless you fall behind on taxes or allow the house to slip into disrepair, the lender cant foreclose on the property. You can continue living in the house even if you live many years beyond expectations and the size of the debt surpasses the value of the house itself.
How You Spend The Money
How you spend your reverse-mortgage proceeds can affect deductibility of the interest as well. The IRS limits this deduction to loans where the money is used to buy, build, or substantially improve your home. Youd be ineligible for a deduction if you use the money to cover day-to-day expenses or to take that cruise you’ve been waiting for all your life, because a reverse mortgage is considered to be a home equity loan. It’s not a traditional mortgage.
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What Other Tax Deductions Are There For Homeowners
In addition to the mortgage interest deductions discussed above, some homeowners might be eligible for deductions on their property taxes or capital gains taxes.
If you arent able to qualify for any tax deductions, tax credits might be another avenue to look into. A mortgage interest credit, for example, allows qualified homeowners to claim a credit on their tax return thats worth a percentage of the mortgage interest they paid over the course of a given tax year.
