Once a Home Equity Conversion Mortgage (HECM) comes due, there are certain options that are available to the relevant borrowing parties when repaying the loan’s balance, but they also come with their own tax implications. This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and a member of the Funding Longevity Task Force, in a new piece at Forbes.
“When the final repayment is due, the title for the home remains with the borrower or estate,” Pfau writes. “Should beneficiaries wish to keep the home, the smaller of the loan balance or 95 percent of the appraised home value can be repaid with other funds. Heirs can also refinance the home with a traditional mortgage should they wish to keep it.”
Other options available to beneficiaries wishing to keep the home include taking out a new HECM to cover the remaining loan balance if they qualify, or – if the outstanding balance is greater than what the home can be reasonably sold for – then heirs can simply give the home to the lender in the form of the property’s deed instead of going through a foreclosure, or needing to sell the property themselves, Pfau says.
“However, they may be sacrificing a large interest deduction on their taxes if they do this,” Pfau explains. “They should consult a tax professional first.”
In terms of taxes, however, the presence of a reverse mortgage can create some complexities in terms of available deductions, which Pfau also details are the subject of ongoing study of the tax code. “Individual cases vary, so always consult a tax professional with reverse-mortgage experience,” Pfau advises.
Certain taxes – including interest charges, mortgage-insurance premiums and potentially real estate taxes – may be accumulated as part of the loan balance, Pfau says, and may not be repaid until many years later.
“These are all potentially deductible at different points in time, either as they are incurred or when repaid,” Pfau says. “After the 2016 tax year, mortgage-insurance premiums are no longer deductible.”
However, mortgage-insurance premiums can be tax deductible, Pfau details, if the borrowing “reflects acquisition debt.” HECM for Purchase (H4P) qualifies under this criteria.
Read the full article at Forbes, sourced from Pfau’s book “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.”