Homeowners

Reverse Mortgages and Taxes: The Advantages Homeowners Won’t Want to Miss Out On

For most homeowners, their property home is the single largest asset they own. And those 62 and older were sitting on a record $14.66 trillion in home equity in the third quarter of 2025, according to the National Reverse Mortgage Lenders Association.

If you’re retired and worried about outliving your savings, a reverse mortgage is one way for older homeowners to put that home equity to work. And there may be tax advantages to taking out one of these loans.

“They’re a fine tool for…those who are house rich and asset or income poor,” said Mike Chadwick, president of Fiscal Wisdom Wealth Management.

So, what does it mean for your taxes if you’re getting money from a reverse mortgage?

What is a reverse mortgage?

First, some background. A reverse mortgage, also called a Home Equity Conversion Mortgage (HECM), allows qualifying homeowners to convert their home equity into cash without selling their homes.  

The loans are available to those who are 62 and up and have at least 50% equity in their primary homes.

Those approved for the loan receive a lump sum, a line of credit, or can draw money monthly. Meanwhile, they retain ownership of the home and can continue living in it. They also need to pay property taxes, homeowners insurance, and maintain the home.

The loan becomes due once the homeowner moves, sells the home, or passes away.

But reverse mortgages are not without some risks. The loan balance grows over time, and these mortgages reduce the equity you (or your heirs) have in the home.

However, your heirs may still be able to inherit the property by paying back the balance on the loan. Or they can sell the property and pocket the proceeds, minus what the lender is owed.

What are the tax advantages of a reverse mortgage?

Reverse mortgages also come with some tax advantages.

Since the money paid out is a loan, it’s not considered taxable income by the Internal Revenue Service (IRS). That means you do not need to report reverse mortgage proceeds on your tax return.

The extra money won’t push you into a higher tax bracket or reduce your Social Security or Medicare benefits.

Plus, the interest may be deductible later on.

Some retirees use reverse mortgage funds to cover living expenses, instead drawing from their 401(k) and paying income tax. This strategy can also allow retirement accounts to continue growing tax-deferred.

That said, if you receive Medicaid or Supplemental Security Income (SSI), be careful. If you don’t spend funds from a reverse mortgage within the same month you receive them, it could count as an asset and potentially affect eligibility.

You may want to consult with a financial advisor, mortgage loan officer, or tax professional before making a decision. There are many variables depending on your tax bracket, how much equity you have in your home, current interest rates, and your long-term financial plan.

Do reverse mortgages trigger capital gains taxes?

A reverse mortgage on its own does not trigger capital gains taxes. However, if the home is sold to repay the loan, the owner may need to pay capital gains taxes.

That’s because the home may have appreciated significantly since it was purchased. If you’re single and the sale price is more than $250,000 more than the original price you paid for it, you could owe taxes on any additional amount.

The capital gains exclusion is doubled for married couples, so they don’t have to pay taxes on up to $500,000 in profits.

Is the interest on a reverse mortgage tax deductible?

Unlike many other types of mortgages, the interest paid on a reverse mortgage can only be deducted once the loan is repaid. This is typically when the home is sold or the borrower passes away.

That’s different from a traditional mortgage, where you may be able to deduct interest annually.

The interest deduction for a reverse mortgage is also limited. It's generally only if the money from the loan was used to buy, build, or substantially improve the home.

If you used the funds for living expenses or medical bills, the interest likely won't be deductible. But if you used the loan to renovate a bathroom or replace the roof, you may be able to deduct the interest once the loan is paid off.