Reverse Mortgage with points

[TAX4US]

I have not seen this before. I have a TP who got a reverse mortgage 220k. He paid 8k in points to get loan. He died 6 months later. Estate was required to pay off points and interest when they sold the house. I know the interest is limited to interest on 100k. What I am not sure is what to do with all these points? Include them as interest and limit to 100k? Put them on deceased tp final return? Allocate them to tp and the estate? Help is needed. BTW this all occurred in the same tax year. What do you think would be the correct way to handle the points?

[Burke]

Points do not go on TP's final return as estate sold house and paid them after his death. They are deductible as interest by the estate, but total interest is subject to the normal limitations -- $100K. Do you have original papers? Are you sure all $8K was points, or other charges such as origination fees, etc. etc.

[TAX4US]

tp deposited 212k into bank account per bank stmt. points were 8k per hud form. tp died estate sold property paid mortgage 220k plus all accrued interest 3 months after death. As stated all this in 1 year. does this make it any clearer?

[Burke]

I understand what you are saying. The answer is the same. The points are counted as interest, along with the other interest accrued. The estate deducts it since that is the entity who paid it, not the taxpayer who died. But it is limited the same as any home equity loan to the first $100K of debt. I would say you could prorate it -- which if you calculated as Total Int / Total Loan ($220K) would give you a percentage of the deductible interest. Can't give you a cite on this or ruling but it makes logical sense.

[TAX4US]

Thanks pretty much the way I was looking at the overall picture.

[Burke]

After mulling this over, I am not sure my calculation as presented would be correct. If you divide the allowable debt ($100K) by the total debt ($220K) = you get 46%. So wouldn't you be able to deduct 46% of the interest? Hmmm....I never said I was a mathematical genius.
The exact same treatment would be applicable to any home equity loan which exceeds $100K. Pub 936, page 9 illustrates a situation where total debt exceeds allowable debt, but it does not tell you how to figure the exact amt of deductible/non-deductible interest. I don't see any other way, frankly, but I have never had a client have more than $100K in a HELOC.

[Roland Slugg]

The estate can deduct as interest, on F-1041, 45.4545% of the total of (1) the interest and (2) the points. ($100,000 ÷ $220,000 = .454545...)