What the New Tax Law Means for Reverse Mortgage Borrowers

American taxpayers and accountants are still sorting out the effects of the wide-reaching Republican-led tax overhaul, and the ramifications could be severe for reverse mortgage borrowers — or nonexistent, depending on who you ask.

One key problem could potentially arise from new rules regarding the deduction of state and local taxes (SALT) from federal returns, which had been a key lifeline for homeowners of all ages in certain high-tax states such as New York, New Jersey, and California.

Under the old tax structure, homeowners could deduct the entire amount of their property taxes from their federal bills — a boon to residents of certain places like suburban Nassau County, N.Y., where average property taxes could run higher than $11,000 for even a median-priced home worth about $511,000.

But the new tax caps the SALT deduction at $10,000 for income, property, and sales taxes combined, which could lead to a substantial overall tax increase for those homeowners. Rep. Tom Suozzi, a Democrat who represents higher-income areas in Nassau County, wrote to the Internal Revenue Service asking the agency to allow deductions for 2018 tax payments made in 2017, Long Island newspaper Newsday reported; the IRS indicated that prepaid taxes could indeed be deducted, but only if they were assessed and paid before the new year.

Residents of Nassau and neighboring Suffolk County lined up in droves during the final days before January 1, with some town tax collectors extending their hours and remaining open on New Year’s Eve, a Sunday — all so residents could voluntarily pay their 2018 taxes in advance.

The reverse impact

For reverse mortgage borrowers, property taxes represent a major chunk of ongoing payment obligations, along with homeowner’s insurance. At least one consumer advocate, foreclosure defense lawyer Joshua Denbeaux, has warned that capping SALT deductions could have an adverse impact on seniors with Home Equity Conversion Mortgages.

“I am going to see more clients,” said Denbeaux, a partner at the firm of Denbeaux & Denbeaux in Westwood, N.J. “I know that for a certainty.”

Denbeaux, who also wrote an editorial for The Hill expressing his concerns, said a substantial amount of New Jersey homeowners have annual property tax bills in excess of $10,000.

“When you’re on a fixed income and you have to cover the tax bill, and it goes up by whatever percent — you’ve got a big financial hit that you weren’t expecting, and none of the people who come to me have the flexibility to adjust to it,” Denbeaux told RMD.

But professionals in the HECM industry pushed back on the concerns. Tom Holsworth, vice president of reverse mortgage lending at the Queens, N.Y.-based Quontic Bank, said some higher-end HECM borrowers could end up coming out ahead overall thanks to the automatically higher standard deduction — which nearly doubled for married couples filing jointly, rising from $12,700 to $24,000.

“The impact to those [borrowers] would be case-by-case, but I say the impact would be minimal by the time they claim their…deductions,” Holsworth told RMD.

Still, Holsworth also cautioned that much remains up in the air.

“It’s a case-by-case [basis], and there certainly will be an impact. Whether it’s positive or negative yet, I’m not real certain for any client,” he said.

Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage in the Virginia suburbs of Washington, D.C., said that the financial pressures affecting her clients outweigh the potential negative effects of tax reform.

“Many of my clients live in high-property-tax-jurisdictions and are in homes valued far above the national average,” MacNaughton told RMD. “However, most have exhaustively weighed and considered their options — and the cost of those options — and have decided a reverse mortgage is the best among those options.”

“The vast majority of my clients are referred to me by legal professionals or wealth managers, and most of my homeowners are working in concert with adult children. Property tax deductibility and the new tax laws are not going to have a severe impact, as other financial considerations are going to remain far more pressing,” she said.

Written by Alex Spanko

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