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Reverse Mortgages and Their Tax Breaks for Seniors

Many seniors find themselves in the same boat; they have an expensive home that has increased in value substantially, but they are struggling when it comes to day-to-day cash flow. Yet, they that if the sell the home, they will have to turn a significant amount of their profits over to the tax man. A regular home equity loan, or second mortgage, will only help the cash flow problem temporarily; after the loan amount is spent, then they will be faced with two mortgage payments and even less cash in the bank. If this sounds like your circumstances, then you should know there is another option out there that can help you pay for your retirement while avoiding costly taxes. A reverse mortgage has saved many seniors from retirement financial ruin.

First, let's look at what a reverse mortgage is. Reverse mortgages are loans based on the equity in your home, but unlike traditional mortgages, you do not have to make any payments on the loan until you decide to move, or until one of the homeowners passes away. The loan amount increases over the term of the loan, as interest accrues. If you sell your home, you must pay the entire loan amount, and if you or your spouse passes away, the entire loan amount then becomes due.

That may sound a little scary, but a reverse mortgage can become a win-win situation for both you and your heirs. For you, you get to cash in your home, and enjoy your retirement without the stress of worrying about money, and without selling your home and turning the profits over to the IRS. The only fees you'll pay are the fees to set up your loan. While it's true your heirs will be left facing a decision between selling the home or paying off the loan in full to keep it, a reverse mortgage can actually be beneficial to them, as well.

If they sell the home and use part of the profits to pay off your loan, then the profit they make on the home is likely to be less than the $250,000 cap for tax free capital gains; while they may get less on paper, they will be getting the money tax free. If your home has depreciate since you started your reverse mortgage, and the amount your heirs can sell it for is less than the outstanding home loan amount, they are only obligated to pay back the total sale amount. They will never be out of pocket covering the loan.

A reverse mortgages is a great way to tap into the value of your home without selling it, but there are a few drawback to be considered. First, reverse mortgages are not available to anyone under the age of 62; which means if you and a spouse jointly own a property, you cannot apply for a loan until you both reach that age. Second, reverse mortgages can be expensive, as the loan amount sits and accrues interest when you are not making any payments. For this reason, you should not take out a loan unless you home has seen a significant increase in value since you purchased it; you simply won't get the most out of the reverse mortgage loan. You must own your home outright to get a reverse mortgages, or at least be able to pay off any remaining mortgage payments out of the loan money you receive.

The pros and cons of a reverse mortgage can only be determined on a case by case basis. Pay a visit to a financial expert, if you are considering a reverse mortgage, to determine if you are a good candidate or not.