Last Wednesday, I published IRS Misinformation on Reverse Mortgages in which one section of the IRS Tax Guide for Seniors, Publication 554, was reviewed. For the first time in that publication, the IRS added a paragraph on reverse mortgages (RMs). Several sentences in that paragraph needed correction.
One problem in particular really stood out, the question of when deductible interest on a RM can be deducted. In Revenue Ruling 80-248, the IRS had previously stated that interest can be deducted when paid, but in Publication 554, a different group in the IRS now claimed that none of the interest could be deducted until the RM is paid in full. Of course as most of us know, usually none of the interest on a RM is paid until the RM is paid in full.
The next morning (January 29, 2009) the IRS responded to an email I had sent them on December 18, 2008 about the apparent conflict between Revenue Ruling 80-248 and Publication 554. In their email they stated that Publication 554 is being revised to include the “when paid” standard of Revenue Ruling 80-248. This is a welcome result for those RM borrowers who do tax planning and pay down their RMs to take advantage of interest deductions (and in the process generally lower their overall net RM costs) before the mortgage becomes due and payable.
The unrevised Publication 554 is no longer available on the IRS website. Below is a redacted and edited copy of the January 29th email from the IRS. The salutation and content, however, remain intact as does font color and style.
Dear Mr. Veale:
Thanks for your email regarding the material about reverse mortgages in our Publication 554. Because of your email, we are planning to revise that material as shown below (changes shown in red). We are planning to post the revised publication on www.irs.gov within the next few days.
A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original interest discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan [deleted: is paid] in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on home equity debt discussed in Publication 936, Home Interest Mortgage Deduction.
You mentioned that there is at least one other statement that may need correction. If you could let me know this week what that statement is, we may be able to fix it as well.
Tax Law Specialist (Reviewer)
Tax Forms and Publications Division
As requested, in an email sent early Sunday morning (2/1/2009), several issues were presented to the IRS including some the Publication did not address:
- Changing the sentence on the tax-free nature of RM proceeds so that it declares that reverse mortgage proceeds are generally not taxable at the time they are received.
- Modifying the last sentence to add Acquisition Indebtedness and Personal Indebtedness as other categories of interest that limit the deduction of qualified residence interest.
- Correcting the name of IRS Publication 936 to Home Mortgage Interest Deduction.
- Adding other items of concern: deductibility of 1) FHA MIP and 2) origination fees.
Because of the short time frame the IRS is up against, it is doubtful that the IRS will incorporate the additional suggestions other than the correction of typos and some simple editing. Taking everything into consideration, this has been one of the most pleasant and courteous experiences in a spirit of cooperation yet with the IRS.
James E. Veale, CPA, MBT
SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending
Because facts and circumstances can vary between taxpayers, the advice rendered in this article was not written for the purpose and cannot be relied upon to avoid or mitigate any tax penalties. As in all tax matters, taxpayers should seek the advice of a qualified tax professional who is knowledgeable, experienced, and competent to advise on such matters.Email This Post Print This Post
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