Reverse Mortgage effects on Tax, Social Security & Medicare

Reverse Mortgage effects on Tax, Social Security & MedicareA senior Reverse Mortgage makes the senior citizen of age 62 or older to borrow the money against their shares in the house. The senior reverse mortgage is an additional source of income against the house owned by the homeowner. Under the reverse mortgage, the citizen has two options. Either the owner can receive money in installment or the lump sum from the lender directly, or the homeowner can buy an insurance policy from the money earned from the reverse mortgage. Here we are going to discuss both the scenario.

Money received from the lender:-
As per lax laws, Any transfer of capital asset and profit made on it is to be treated as capital gain and is taxable. But the act of mortgaging the property does not treat the reverse mortgage as a transfer. So the monetary gain from the reverse mortgage is not liable to be taxed. Mortgage property is not treated as a transfer, but it will be when the house is disposed of by the borrower or by the lender or by his legal heirs. Then the property will be taxable. If the property is disposed of by the lender, then the capital gain liability would have to be discharged by the homeowner or their legal heirs but not by the lender. It is to be noted here that if the homeowner or his legal heirs don’t want to sell the property but want to pay for the dues from another source of income, then there will not be any tax implications as the repossession of the property is not a transfer.

Annuity receiving from a Life Insurance company:-
If the borrower doesn’t want the money in the lump sum, but he requests the lender to give the amount in the lump sum to an insurance company. And the company makes an agreement to pay the money to the borrower periodically, which is an annuity. The amount and tenure of the annuity completely depend on the options chosen by the borrower. The tenure even could be more than a period of 20 years. So the transaction of money directly to the insurance company does not involve the transfer of capital gains. But the money received from the annuity is different from the payment received directly from the bank. As per the tax laws, annuity received comes under the head “Income from Other Source” and is taxable. It is clear under the tax laws presently that the option of receiving the money from the bank directly is tax efficient as compared to money received from the annuity. But from the annuity, you can receive the money for the lifetime but not from the bank.

Effect of Reverse Mortgage on Social Security:-
A reverse mortgage doesn’t affect your social security at all. You will be continuously receiving the social security benefits regardless you have the reverse mortgage or not. You paid for the social security while working, and you will be getting your social security benefits regardless of your reverse mortgage status. The reverse mortgage also has not any effect on the pension.

Effect of Reverse Mortgage on Medicare:-
Medicare comes under the social security act to provide health care benefits to the senior citizens. Medicare is a way in which government assists the senior citizens in their healthcare costs. Like Medicare, the reverse mortgage system is a government program to assist the senior citizens financially. It means that you will keep receiving your Medicare benefits independent of the status of your reverse mortgage.