Tax deductions and reverse mortgages
The costs associated with a reverse mortgage might allow you to take some income tax deductions.
Property taxes are deductible if you itemize your deductions on Schedule A, though many seniors may not have enough deductions to make itemizing a better choice than taking the standard deduction. And if you pay off your reverse mortgage at some point -- say, because you want to move -- all the loan interest you pay to the lender at that point will be tax deductible if you itemize. In this case, you're more likely to be able to itemize your deductions because you'll be paying a large amount of interest in a lump sum. In the year you sell, you might then also be able to deduct your property taxes.
Seniors who choose to make payments on their reverse mortgage while still living in the home, which they might do so they can borrow more later and owe less interest, can also deduct interest in the year they pay it. Mortgage insurance premiums may be tax deductible as well if your adjusted gross income is less than $100,000.
While homeowner's insurance is another cost associated with a reverse mortgage, it is not tax-deductible.
Capital gains taxes and reverse mortgages
You could owe taxes if you have a capital gain when you sell your home and pay off your reverse mortgage.
But the first $250,000 of home price appreciation isn't taxable when you sell if you're single, and the first $500,000 isn't taxable when you sell if you're married. That means if you bought your home for $150,000 and you sell it for $250,000, you won't owe any capital gains tax because you're only making $100,000 on the sale.
However, if you bought your home for $150,000 and you sell it for $500,000 and you're single, you will owe capital gains tax on the amount of the gain above $250,000, which would be $100,000.
This capital gains tax exemption applies as long as the home has been your primary residence for two of the past five years before you sell it, though there are exceptions to the two-year rule if your move is related to a change in your health or employment. Also, home improvements increase your home's cost basis, so if you'd made $100,000 in improvements on your $150,000 home, you wouldn't owe any capital gains tax.
The bottom line
In sum, taking out a reverse mortgage is a major financial decision with important implications. But proceeds from a reverse mortgage is not taxable income.