Forbes: How Reverse Mortgages Can Affect Taxes in Retirement

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For seniors who may feel squeezed by the necessity of paying taxes in retirement on a fixed income, there are a number of ways in which a senior might be able to reduce their tax burdens in retirement. One of the possible methods can include a reverse mortgage, according to financial planner Erik Carter in a new piece published at Forbes.

The employment of home equity is one such option for mitigating a tax burden, Carter writes, and you can do so simply by not leaving the home.

“There are several ways to get tax-free income from your home. One is to simply live in it,” Carter writes. “Your home is paying you income in the form of free rent, a concept called imputed rent. Fortunately, this ‘income’ is tax-free.”

Unlocking the equity may be a more correct solution, however, and for seniors wishing to explore that option they can look to something like a reverse mortgage, he says.

“You can also take a reverse mortgage against your home, which is just what it sounds like. Instead of you paying your mortgage company, the mortgage company pays you and it’s not considered taxable income,” he says. “You also get to keep your home as long as you live in it. However, when you move out or pass away, the home will be used to pay back the mortgage company plus fees.”

Some seniors may decide that another method could be more useful, such as downsizing by selling your existing home and moving into a smaller one.

“As long as you’ve lived in the home as your primary residence for two out of the last 5 years, you pay no capital gains tax on up to $250k of gain (or $500k for a married couple that files jointly),” Carter writes. “Like other investments, the home can also pass on to heirs with a step-up in cost basis, which can reduce or eliminate any tax on your lifetime gain if the property is sold.”

That’s not to say that a retiree will be able to entirely avoid a tax burden by using a reverse mortgage, however. Reverse mortgage industry educators Dan Hultquist and Jim McMinn touched on exactly that topic last year at the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting and Expo in Nashville, Tenn., noticing that some reverse mortgage companies advertise the loans as “tax-free” without elaboration.

“It’s always been marketed as that, I see it all the time,” McMinn said at the meeting. “When you’re getting a reverse mortgage, there could be taxes associated with that. We’ve got property taxes, recording taxes, intangible taxes, the list goes on. So, when we look at that, we have to specify [it is the proceeds] of the loan [which are] actually tax-free.”

Artcile by Chris Clow on