Reverse mortgage income taxes

When the federal government taxes its citizens, it does so with several purposes in mind.  Generally, one may argue for public welfare as the main reason. 

The citizenry on their part may have a different view.  Some will say they have a natural right to enjoy the fruits of their labor while others will say income tax systems create perverse incentives by encouraging tax payers to spend even more.  This is a debate that may never end.

The evolution of reverse mortgages was as a result of the stimulation and constant agitation by both the senior members of the society and the public at large for their to be enacted legislation that will cater for the needs of these who have retired and are now either fully depending on their children or the state for support. 

It is now possible for these, who meet the qualifications, and they are not stringent, to qualify for what is referred to as a reverse mortgage.  It enables homeowners aged 62 and over to use their home equity as security for loans which they can receive either monthly, in a lump sum of cash, a line of credit or a combination of any or all of the above. 

For reverse mortgages, there are no credit or income qualifications and there is no repayment until the owner of the home dies or permanently leaves it.

As sure as income tax

The foremost Federal income tax in the United States can be traced back to under Article 1, section 8 clauses 1 of the U. S Constitution during the civil war.  Currently, these taxes are levied under the quoted provisions of the Constitution and various sections of Subtitle A of the Internal Revenue Code of 1896. 

The Federal government of the United States levies progressive tax on the taxable income of individuals, partnerships, companies, corporations, trusts, decedent’s estates and certain bankruptcy estates.  The tax masters net will catch nearly every person, natural an artificial.

Application of income taxes on reverse mortgages

Just like interest rates on reverse mortgages, the law and consequently the authorities are very lenient.  Indeed, any proceeds from reverse mortgages are taken to be loans and not income.  As is the case with other loans, the reverse mortgage advanced by the mortgagor will not be subjected to taxation.

West Virgina Attorney General Darell McGraw talks vividly about the benefit of reduced taxes or no taxes at all when he and his colleagues are finally given reverse mortgage loans. 

He refers to the fact that as much as the income derived from a reverse mortgage is still an income, it already reduces the equity in the house and it will therefore be a disadvantage to tax it.  For these who are at a loss on what home equity is, it is basically the net value of the house, that is the difference between its fair market value and the balance of unpaid loans and other encumbrances.

Indeed, a loan advanced through reverse mortgages avoids extreme interest rate charges and it may therefore be absurd to levy income tax on it. 

References

1. http://www.pillarmortgage.com/reverse.html
2. http://www.gatewayhomeloans.com/rcenter/reverse-faq.htm
3. http://www.wvago.gov/pdf/brochures/2007_revmortgage.pdf