No. Homeowners who take out reverse mortgages can’t deduct the interest from their taxable income because they don’t pay it currently – it is added to the loan balance, which isn’t paid until the house is sold. Ordinarily, that doesn’t happen until they die or move out permanently.

The one possible exception is where the reverse mortgage borrower is forced to pay some or all of the closing costs in cash, rather than including them in the reverse mortgage balance. This situation arises when the reverse mortgage borrower has an existing mortgage that is so large that paying it off exhausts most or all of the lending limit of the reverse mortgage. (Under the rules, any existing mortgage must be paid off with the proceeds of the existing mortgage).

For example, a reader reported a situation where he had a $200,000 balance on his existing mortgage, the maximum loan limit on the reverse mortgage was $206,000, and total costs of the reverse mortgage were $14,000. Mortgage insurance was $6,000, lender’s origination fee was $5,000, and other costs were $3,000. This left him $8,000 short, and that amount had to be paid in cash. He wanted to know if there was any way to make this deductible?

After warning him that I was not a tax lawyer, I suggested that he pay the lender's origination fee in cash, because it should be deductible. An origination fee expressed as a percent of the loan amount is conceptually identical to points, which are deductible. However, points are deductible in the transaction year only on home purchases. Otherwise, they must be spread over the life of the loan. Since a reverse mortgage has no term, I suggested using his expected life in the transaction year as shown on a mortality table.

Copyright Jack Guttentag 2006