Tax and Public Assistance Consequences

The IRS does not consider loan advances to be income, so you do not pay income tax on the proceeds you receive. As for the deductible nature of the interest, this is different than a conventional mortgage. In a conventional mortgage, you can deduct the interest for mortgages for up to, but not exceeding the value of your home. Interest accrued on a reverse mortgage is also deductible, but not until the loan has been repaid after you leave the property.

If you take a reverse mortgage, there may be ramifications if you are on certain federal or state assistance programs. If you receive public benefits such as Medicaid or SSI, a loan advance is considered to be a liquid asset if you have funds left over at the end of the month. Whether your reverse mortgage will affect your Medicaid, SSI or other benefits depends on your state, and how you use the proceeds of the loan.

If you are considering a reverse mortgage to supplement your monthly income, find out the maximum amount of liquid assets you are allowed under each public assistance program you are on, and set the monthly amount you receive accordingly. Carefully evaluate the different ways of receiving your reverse mortgage funds, and how each different method, i.e., lump sum, line of credit, or monthly payment, may affect any government benefits you may be receiving.

Receiving a lump sum payment is more likely to affect any benefits you may be receiving. If you depend on these benefits, receiving a monthly payment or taking a line of credit to be used for expenses as needed is probably the best option.

Proceeds from a reverse mortgage will not affect any pension benefits, social security benefits, or Medicare. If you have placed your home in a living trust, you may still be able to take out a reverse mortgage, although the mortgager will want to review the trust documents before issuing the loan.