Any discussion of the deduction of interest is very complex.
The portion of the interest that is interest charged on top of interest (commonly called compound interest) may not be deductible as home mortgage interest at all since it is not being charged on proceeds being used to acquire the home or proceeds qualifying as home equity indebtedness. The deduction of compound interest is a huge issue yet to be addressed by either the IRS or the courts. Tax advisers have differing views on deductibility of this portion of the interest.
If the estate or heirs pay any interest that accrued during the life of a decedent, the estate or heirs may be eligible to deduct that payment in the same manner as the decedent had the decedent lived to make that payment [Internal Revenue Code Section 691(b) and the related regulation]. Interest accrued during the period that the estate or heirs hold title to the collateral will generally not be home mortgage interest unless the home is a qualified residence of the taxpayer deducting the interest but it may qualify for deduction under another category of interest.
It is not defensible to deduct property taxes before they are imposed which generally means a tax has been received before or in the year of the tax deduction. So unless there is a bill received before the income tax year or during that year, payment of real estate taxes are prepayments, not deductible until the later of the income tax year paid or the income tax year imposed.
Bunching is much different than indicated. It is not just two years but can be many years. Charitable deductions are simple to bunch since all that is required is payment in the income tax year of deduction and a receipt from the charitable organization receiving the donation. However, like stated in the article, not all income tax deductions reduce income tax liabilities because of things like percentage of adjusted gross income limitations, the standard deduction, or insufficient income to make the deductions useful.
Too many times, tax advisers are so focused on the home mortgage interest deduction when analyzing categories of interest which are deductible, they ignore the overall rule that taxpayers can elect to deduct the interest in other categories if proceeds have been employed in those categories. For example, if the proceeds are used to buy business inventory for the family business, some of the interest may be deductible as accrued and may not only reduce income tax liabilities but also self-employment tax. If used for working capital in rental operations, it can be deducted as rental expense. BUT for most borrowers if deductible, such deduction is only available as an itemized deduction.
Finally, the deduction of the interest can be borrowed from the line of credit from an adjustable rate reverse mortgage as long as the money is held long enough outside of the loan so that it is clear that the cash was subject to risk. If it is simply taken out and put immediately back in to pay down interest, the IRS may correctly treat it as nothing more than a bookkeeping entry and thus not a true payment of interest for income tax purposes.
Then there is the surprise. Taxpayers refinance their reverse mortgage and get a Form 1098 showing all accrued interest on the first reverse mortgage as paid in full. If refinanced in the wrong tax year, the deduction may be entirely or greatly wasted. Also refinance fees may make this technique ill advised.
Reverse mortgages can be an amazing income tax tool but because of technicalities it is best to work with a tax adviser who is not only competent in interest deductions but also one who is familiar with reverse mortgages. Few income tax advisers fully understand reverse mortgages.
“Then there is the surprise. Taxpayers refinance their reverse mortgage and get a ****Form 1098 showing all accrued interest on the first reverse mortgage as paid in full. If refinanced in the wrong tax year, the deduction may be entirely or greatly wasted. Also refinance fees may make this technique ill advised”. Surprise for sure, I had no idea a 1098 was issued for a refinance. This is something I have never heard discussed amongst my fellow HECM peers.
It is a PROFOUNDLY true statement that few (I would suggest NONE) financial experts, Tax consultants, or ANY OTHER profession understands the tax implications of the HECM refi. That being said, the down side of forcing the issue is an audit which forces the IRS to clarify its own position, not the Client’s. Further to the truth, the recognition that the FHA-HECM is saving states BILLIONS in Medicaid fees, and other related expenses, and is helping to improve the finances of many retiree’s will (I believe) compel them to “put up, and shut up”. This camel has its nose under the tent.
Tools for Retirement Planning 
Any discussion of the deduction of interest is very complex.
The portion of the interest that is interest charged on top of interest (commonly called compound interest) may not be deductible as home mortgage interest at all since it is not being charged on proceeds being used to acquire the home or proceeds qualifying as home equity indebtedness. The deduction of compound interest is a huge issue yet to be addressed by either the IRS or the courts. Tax advisers have differing views on deductibility of this portion of the interest.
If the estate or heirs pay any interest that accrued during the life of a decedent, the estate or heirs may be eligible to deduct that payment in the same manner as the decedent had the decedent lived to make that payment [Internal Revenue Code Section 691(b) and the related regulation]. Interest accrued during the period that the estate or heirs hold title to the collateral will generally not be home mortgage interest unless the home is a qualified residence of the taxpayer deducting the interest but it may qualify for deduction under another category of interest.
It is not defensible to deduct property taxes before they are imposed which generally means a tax has been received before or in the year of the tax deduction. So unless there is a bill received before the income tax year or during that year, payment of real estate taxes are prepayments, not deductible until the later of the income tax year paid or the income tax year imposed.
Bunching is much different than indicated. It is not just two years but can be many years. Charitable deductions are simple to bunch since all that is required is payment in the income tax year of deduction and a receipt from the charitable organization receiving the donation. However, like stated in the article, not all income tax deductions reduce income tax liabilities because of things like percentage of adjusted gross income limitations, the standard deduction, or insufficient income to make the deductions useful.
Too many times, tax advisers are so focused on the home mortgage interest deduction when analyzing categories of interest which are deductible, they ignore the overall rule that taxpayers can elect to deduct the interest in other categories if proceeds have been employed in those categories. For example, if the proceeds are used to buy business inventory for the family business, some of the interest may be deductible as accrued and may not only reduce income tax liabilities but also self-employment tax. If used for working capital in rental operations, it can be deducted as rental expense. BUT for most borrowers if deductible, such deduction is only available as an itemized deduction.
Finally, the deduction of the interest can be borrowed from the line of credit from an adjustable rate reverse mortgage as long as the money is held long enough outside of the loan so that it is clear that the cash was subject to risk. If it is simply taken out and put immediately back in to pay down interest, the IRS may correctly treat it as nothing more than a bookkeeping entry and thus not a true payment of interest for income tax purposes.
Then there is the surprise. Taxpayers refinance their reverse mortgage and get a Form 1098 showing all accrued interest on the first reverse mortgage as paid in full. If refinanced in the wrong tax year, the deduction may be entirely or greatly wasted. Also refinance fees may make this technique ill advised.
Reverse mortgages can be an amazing income tax tool but because of technicalities it is best to work with a tax adviser who is not only competent in interest deductions but also one who is familiar with reverse mortgages. Few income tax advisers fully understand reverse mortgages.
“Then there is the surprise. Taxpayers refinance their reverse mortgage and get a ****Form 1098 showing all accrued interest on the first reverse mortgage as paid in full. If refinanced in the wrong tax year, the deduction may be entirely or greatly wasted. Also refinance fees may make this technique ill advised”. Surprise for sure, I had no idea a 1098 was issued for a refinance. This is something I have never heard discussed amongst my fellow HECM peers.
It is a PROFOUNDLY true statement that few (I would suggest NONE) financial experts, Tax consultants, or ANY OTHER profession understands the tax implications of the HECM refi. That being said, the down side of forcing the issue is an audit which forces the IRS to clarify its own position, not the Client’s. Further to the truth, the recognition that the FHA-HECM is saving states BILLIONS in Medicaid fees, and other related expenses, and is helping to improve the finances of many retiree’s will (I believe) compel them to “put up, and shut up”. This camel has its nose under the tent.