Does Reverse Mortgage Count as Income?

A reverse mortgage is a financial tool that allows homeowners, generally those 62 and older, to access a portion of their home’s equity. It functions as a loan against the value of a home, providing cash to the owner without requiring them to sell the property. The funds can be received as a lump sum, a series of monthly payments, or a line of credit. Unlike a traditional mortgage, a reverse mortgage pays the borrower, and the loan is repaid when the homeowner sells the home, moves out, or passes away.

Tax Treatment of Reverse Mortgage Proceeds

The Internal Revenue Service (IRS) does not consider money from a reverse mortgage to be income. Instead, the IRS classifies these payments as loan proceeds. Because the funds are a loan advance and not earnings, they are not subject to federal income tax.

You do not need to report money from a reverse mortgage on your annual tax return. While this treatment is generally consistent at the state level, it is a good practice to confirm the specific rules in your jurisdiction.

This tax rule exists because a reverse mortgage does not increase your net worth; it converts an existing asset—your home equity—into cash. You are borrowing against your property, and the loan balance, including interest and fees, must eventually be repaid. This repayment obligation distinguishes the proceeds from taxable income.

Impact on Government Benefits

Reverse mortgage funds affect government benefit programs differently, depending on whether the program is means-tested. For entitlement programs like Social Security and Medicare, eligibility is based on your earnings history or age, not current income or assets. Therefore, these benefits are not affected by reverse mortgage proceeds.

Means-tested programs like Supplemental Security Income (SSI) and Medicaid are different. These programs have strict limits on both income and assets. While reverse mortgage money is not counted as income in the month it is received, any unspent funds become a countable asset in the following month.

For example, SSI has a resource limit of $2,000 for an individual and $3,000 for a couple. If a lump-sum payment from a reverse mortgage is not spent in the same month, the remaining balance could push your assets above this limit. This can cause a reduction or loss of SSI or Medicaid benefits. To manage this, some individuals opt for monthly payments or a line of credit, drawing only what they need each month.

Tax Deductibility of Interest

Interest on a reverse mortgage is considered home mortgage interest, but the deduction rules are distinct from a traditional mortgage. According to IRS Publication 936, you cannot deduct the interest until it is paid. This payment occurs when the loan becomes due and is paid off.

The deduction is not available annually as interest accrues. Instead, the homeowner, their spouse, or their estate may take the deduction in the year the loan is fully repaid. This often happens when the home is sold to satisfy the loan balance.

This deduction is also subject to limitations, as the interest is treated as interest on home equity debt. Under current tax law, this deduction is only allowed if the loan proceeds were used to buy, build, or substantially improve the home. If funds were used for other purposes, such as supplementing income, the interest is not deductible.