Question: Billy took out a reverse mortgage on his principal residence to provide himself additional income during his retirement years. Billy died and Laura, his beneficiary, paid off the balance of the reverse mortgage so she wouldn’t lose the house. Laura asks you if she can take a deduction on her personal tax return for the Form 1098, Mortgage Interest Statement, issued to the estate when she paid off the reverse mortgage. What do you tell Laura?
Answer: No, the reverse mortgage interest reported on Form 1098 to the estate is not deductible on the beneficiary’s personal return. A reverse mortgage is like a home equity loan. Billy took out a mortgage against the equity of his house and then used the loan proceeds to pay for personal living expenses. Billy did not use the reverse mortgage proceeds to purchase, construct, acquire or improve his principal residence [§163(h)(3)(B)]. Interest tracing deems that the loan is for personal expenses; therefore, the interest reported on Form 1098 is not deductible as qualified residence mortgage interest expense under TCJA, which changed the rules on the type of mortgage interest that qualifies as a deductible expense. Generally, a deduction is not allowed for interest paid on a reverse mortgage; however, an estate is allowed a deduction on the principal and accrued interest it pays on the reverse mortgage of a decedent’s home [§2053(a)(4)].
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