If you deal with callers interested in a reverse mortgage, you are aware of the multitude of questions they ask. You should also be aware that the quality, extent and helpfulness of your answers affect their opinions of whether you are sufficiently satisfying their inquiries. Consequently, the degree of your product knowledge often determines whether they will deal with you or find competitors with more satisfying answers.
Competent HECM personnel desire to satiate those who expect, need or want immediately enlightening answers. However, there is one frequently repeated answer endemic to most of our industry that neither immediately enlightens nor satisfies, the essence of which is, “You’ll have to check with your tax advisor about that.” Although that answer may be safe, it is not very helpful.
Before I entered this industry, one of my aunts heard that answer from two HECM lenders, even though her tax questions were basically generic. Like many other people, she had no tax advisor, so she called me and I was able to answer her questions. I remember thinking how strange it was that professionals selling HECMs either didn’t know the answers or wouldn’t answer most tax questions pertinent to their products, preferring to cautiously place the onus of finding those answers on their elderly clients.
While regulated brokers who sell other financial products confidently extol, explain and even calculate the tax benefits, consequences and other tax implications of their products, we generally embrace disclaimers through dismissive referrals to an anonymous “tax advisor,” which we appear to assume everyone has. Is that the best way to serve our clients and gain their confidence in us as knowledgeable professionals? I don’t think so. Therefore, I have developed a more professional and client-satisfying way of responding to tax questions, while remaining within an appropriate disclaimer. Here is an example:
I recently spoke with a 62-year-old caller interested in obtaining a reverse mortgage on his home. Surprisingly, it was the only home he ever owned and he had purchased it only five years earlier. After telling him the potential HECM loan amount, etc., I was barraged with a salvo of tax questions: Is there a maximum tax deduction limit on accrued reverse mortgage interest when paid? If so, what’s the limit? Is the mortgage insurance portion of the negative amortization tax deductible? Can heirs claim the tax deduction if they pay off the loan when mortgagors pass away? How about when they are still alive? Are the deduction amounts different according to how the loan money is used?
In keeping with my usual protocol regarding tax questions, I told him that my replies would be generalities that may not apply to him personally because of the many other variables, situations, filing statuses and limits pertaining to personal tax calculations. Then, while addressing his questions, I cited a pertinent IRS publication and offered to email it to him immediately. He was quite satisfied and appreciative of my help.
When HECMs are paid off, the deductible interest can be huge, usually much more than what is needed to offset tax on income, but the difference need not go to waste. When I mentioned to a prospect that it could be used to offset income tax on a huge, properly timed Roth conversion, it was a significant factor in his decision to go ahead and obtain the HECM.
For those interested in learning more, look up IRS Publication 936.
The next paragraph is only a portion of the material from the IRS site pertaining to reverse mortgages.
A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full.
When reading the entire website, its complexity can be somewhat puzzling. Also, the section detailing the difference between the deductibility of acquisition debt interest and non-acquisition debt interest does not specifically address a HECM for Purchase. But hey, finding the missing pieces and figuring out how to correctly assemble the puzzle is the fun of learning and the best way to retain the information. Learning what you can about the tax implications of a HECM takes some effort, but it allows you to be much more helpful to clients than merely telling them, “You’ll have to check with your tax advisor about that.”