Is Interest on Form 1098-R Tax Deductible?
Learn why the reverse mortgage interest on Form 1098-R is informational and typically isn't deductible until the loan balance is actually paid.
Form 1098-R, “Reverse Mortgage Interest,” is a unique document sent by lenders to individuals with a reverse mortgage. Its purpose is to report the amount of interest added to the loan balance during the year. Unlike a traditional mortgage, a reverse mortgage involves the lender making payments to the borrower, causing the loan balance to grow over time. This form details the interest that has accumulated, which is different from interest that has been paid.
Understanding the Information on Form 1098-R
Form 1098-R breaks down the financial status of a reverse mortgage into several boxes. It is a statement of accrued costs, not a record of payments you have made. Understanding these boxes helps clarify the form’s role in your finances.
Box 1 of the form shows the total amount of interest that accrued on the loan during the calendar year. Accrued interest is the amount the lender calculated and added to the outstanding loan balance. This figure does not represent an amount you have paid, but instead reflects the deferred cost of borrowing that increases what you owe.
Box 2 reports any mortgage insurance premiums the lender paid and added to the loan balance. For many reverse mortgages, particularly Home Equity Conversion Mortgages (HECMs), insurance is a required component. When the lender covers this premium, it is treated as an additional loan advance that increases the total debt.
Box 3 provides the outstanding loan principal at the beginning of the year. This figure includes all prior loan advances and all interest and insurance premiums that have accrued since the loan’s inception. Comparing this amount to the loan balance at the end of the year can illustrate how costs have increased the total obligation.
Tax Implications of Accrued Interest
The primary rule for deducting reverse mortgage interest is that it can only be deducted when it is actually paid, not when it simply accrues. The annual Form 1098-R you receive shows accrued interest, which is why this amount is not deductible in the year you receive the form. According to IRS Publication 936, this interest is treated as home equity debt, and the deduction is deferred until a payment event occurs.
Interest on a reverse mortgage is considered “paid” only when the loan balance is repaid. The most common scenario is when the home is sold. Upon sale, the loan balance, including all accumulated interest, is paid off from the sale proceeds. At this point, the interest portion of that payment becomes potentially deductible for the borrower.
Another event that triggers payment is the death of the borrower, which makes the loan due. If the estate or heirs pay off the loan to keep the home, the interest portion of that payoff is considered paid. A borrower can also make voluntary payments toward the loan balance. If a borrower directs the lender to apply payments to accrued interest, that portion may be deductible for that year.
Until a payment event happens, Form 1098-R serves as an informational update. You should keep all Form 1098-R statements for your records. The cumulative interest shown over the life of the loan will be needed to determine the potential deduction when the loan is ultimately paid.
How to Deduct Paid Reverse Mortgage Interest
Once reverse mortgage interest has been paid through an event like a home sale, the person who paid it may be able to claim a tax deduction. To do so, the taxpayer must itemize their deductions. This path is beneficial only if total itemized deductions exceed the standard deduction amount for the taxpayer’s filing status.
The person eligible to claim the deduction is the one who is legally liable for the debt and actually pays it. If the original borrower sells the home and uses the proceeds to pay off the loan, they can claim the deduction. If an heir inherits the home and pays the mortgage, that heir can deduct the interest they pay, provided they are legally obligated to make the payment.
The paid interest is reported on Schedule A (Form 1040) on the line for home mortgage interest. You must sum the accrued interest from all the years the loan was active, which is detailed in the final loan payoff statement. The deduction is also only available if the loan proceeds were used to buy, build, or substantially improve the home securing the loan. The total deduction is limited to interest on up to $750,000 of mortgage debt ($375,000 if married filing separately) for mortgages taken out after December 15, 2017.