Leveraging a Reverse Mortgage as a Tax-savvy Retirement Savings Tool


To retire comfortably, more and more retirees are considering the benefits of a reverse mortgage loan. This financial tool was designed exclusively for older homeowners to convert a portion of your home equity into funds you can use at your discretion — from managing debt to covering medical expenses or supplementing retirement income. Another reason for a reverse mortgage’s appeal: tax savings.

Sorry, Uncle Sam

As an eligible borrower, the loan proceeds you receive from a reverse mortgage are considered loan proceeds, not earned income. That means the payments aren’t taxable. You can opt to receive funds from a reverse mortgage as a lump sum, monthly payments or a line of credit that’s available if and when you need it.

And they usually don’t affect your Social Security or Medicare benefits. These programs consider your age, rather than your income or assets in their calculations. They may, however, impact needs-based benefits such as Supplemental Security Income or Medicaid, so it’s important to speak with a financial advisor regarding your unique situation.

Remaining in good standing is key

As with any mortgage, you must continue to meet your loan obligations, such as keeping current with property insurance and taxes. You’re also responsible for basic upkeep and home maintenance.

If you fail to meet the terms, your loan may become due and payable. You may be forced to sell the home in which capital gains on the sale may have an indirect impact on your taxes. The IRS does allow a special exclusion to lower the capital gains tax — or the fee you owe on your profits — as long as you own and have lived in the home as your primary residence for two of the last five years. If this is the case, you can exclude up $250,000 if you’re single, or $500,000 if you’re married and filing jointly, to lower the amount.

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