Interest on a RevMo loan

[Roland Slugg]

Reverse mortgage loans were quite popular several years ago. You don't hear much about them these days, but most of the ones taken out in the past are still out there and will have to be paid off some day.

When they are, assuming the home's former owner/occupant has died, who can deduct the interest? There are at least two scenarios: (1) The loan is paid off during the administration of the decedent's estate, or (2) the home passes to an heir who then pays off the loan. Can the estate or the heir deduct all the interest, even though much/most/all of that interest accumulated before the loan became an obligation of the new entity? I wonder.

Also, RevMo loans are "home equity" loans, so are subject to the $100,000 limit for interest deductibility ... something to keep in mind when we run into a payoff situation. This could require a fairly involved calculation, especially if the loan was the type that allowed the borrower to take draws up to the maximum loan limit ... starting out low and eventually building up to and beyond the $100k interest cutoff point.

[erchess]

Third Scenario Exists

I can think of a third scenario that you overlooked and that strikes me as at least as likely as the two you considered. The original borrower before dying leaves the house (perhaps to move into some kind of facility or in with a younger relative) and the lender takes title to the home. It would seem that if anyone can deduct the interest here it would be the original borrower since he or she both borrowed and paid back. But how do you determine the interest rate in this scenario? Is there not even the possibility that the house is worth less than was borrowed? In that case there is no interest, right? Furthermore where is your cite that RevMo interest is ever deductible to anyone? I agree it seems at first blush that there may be one but I'm not claiming the deduction without finding it and I consider myself relatively assertive/aggressive as responsible practitioners go.

[Snaggletooth]

Deceased deducts

Sluggo in Tennessee (and I suspect in many states), upon death and continuing until such time as the estate is settled, the designated representative acts as if the decedent were still alive and conducting his own business.

The two most prodigious requirements are:
1) The obligation to pay must be upon the taxpayer taking the deduction.
2) The payment must actually be made by such taxpayer.

I would have no reservations that the payment by the designated representative would qualify under both of the conditions above. Also, I would deduct the interest in the year of death on the final 1040, and at such time as a 1041 may be required, it becomes a deduction for the 1041.

If the property in question becomes property of an heir subject to the mortgage, then both of the requirements above apply to that heir, and it is deductible as paid. All is subject to the $100,000 limit.