Forward on Reverse: Write-offs could cut HECM costs
Monica Bubasky is a happy woman. The 70-year-old native of Lake Hekmo, Minn. is beside herself with joy. It comes across in her warm chatty voice and tender brown eyes. Her slight 5’4” frame comes alive when she talks about her modernized kitchen and bathrooms. The $40,000 project, paid for with cash from a reverse mortgage she took in September 2007, made her kitchen and bathrooms age-suitable and new. The kitchen cabinets are now on the same level as her dishwasher. No more climbing up and risking falling down to get utensils from her cabinets. Her new bathtub is fall-proof and ringed with baby-soft air-bubble rubber edges on which she can rest her head while taking a hot bath. If she falls for some strange reason, her head would land on a pillow (thanks to the air-bubble edges) that alerts her children and her doctor in neighboring towns.
The tub’s auto-cleanser carries a lifetime warranty. Besides auto-flushing and cleaning, her new toilet bowl performs quarterly fecal and urinal analysis and remotely stores the results in her digital medical record. The wall tiles of the bathroom are maintenance-free for life. It is what the contractor’s marketing literature calls “tomorrow’s bathrooms for older adults who aspire to age-in-place.”
As satisfying as the new kitchen and bathrooms are to Bubasky, our tax code may hold some cash surprise: Deduction for the mortgage insurance premium (MIP) she paid to get the Home Equity Conversion Mortgage (HECM) loan as well as the extra 50 basis points MIP charged to her loan balance and remitted monthly to the U.S. Department of Housing and Urban Development (HUD). Considering that Federal Housing Administration (FHA) insurance premiums generally make up more than 50 percent of HECM costs, the potential MIP write-offs could significantly reduce HECM costs for seniors such as Bubasky.
These potential tax write-offs came courtesy of some little-known provisions in the Tax Relief and Health Care Act of 2006 (Public Law 109-432, as amended by the Mortgage Forgiveness Debt Relief Act of 2007 [Public Law 110-142]) according to James E. Veale, vice president of government affairs at Security One Lending Inc., one of the nation’s leading authorities on taxes and reverse mortgages.
Veale says these guidelines apply to the MIP deduction (Internal Revenue Code Sections 163(h)(3)(E), 163(h)(4)(E), and 163(h)(4)(F)):
◄ Insurance contract must be issued after Dec. 31, 2006;
◄ Reverse mortgage has to be related to “acquisition indebtedness” (constructing, acquiring, major improvement or the refinance of those items);
◄ Borrower cannot have income over $100,000 (or in some cases less) without reduction;
◄ Home has to be a “qualified residence” (a.k.a. principal residence);
◄ No deduction after Dec. 31, 2010;
◄ Pre-paids (i.e. upfront MIP) gets written off over 84 months.
Not every borrower can take advantage of the deductions. In addition to meeting the above guidelines, they must have sufficient taxable income for the deduction to make sense, but Veale believes sharing information about the write-off’s availability is important whether or not your HECM borrowers qualify.
“Even if they don’t have the income, it is still available, and they should still be made aware that it is available,” says Veale, a CPA with more than 38 years experience in tax matters.
Because every HECM borrower’s situation is different and an originator cannot be sure how a customer used their HECM cash, Veale suggests that reverse mortgage originators should not conclude that their customer is eligible without finding out how the cash from the HECM was used.
“The key question is ‘how was the loan proceeds used?’” says Veale.
That is a question that your clients should be able to answer. If they use their reverse mortgage cash for home improvement like Monica Bubasky, then they may be able to make the deduction with the guidance of their tax advisor.
Why should you bring this potential MIP tax deductibility information to your clients’ attention? There are at least two reasons. One, as I advised in my recent book, Think Reverse!, reverse mortgage originators should conduct themselves as consultants, not product salespeople because a reverse mortgage is a solution to your clients’ life-planning needs, not a product to be sold. By bringing the provisions of this little-known tax law to the attention of your clients, their children, or their accountants, you will be showing your clients and their circle of influence that you care about their financial well-being. Acts like these will differentiate you from the product-peddlers in our midst. Secondly, it is another way to add value to your post-closing relationship with your clients. A little postcard from you to your Mrs. Bubaskys may read:
Dear Mrs. Bubasky:
I hope you are doing well. It is tax season again, and I thought you should know that you may be eligible to deduct a portion of the mortgage insurance premium (MIP) you paid the federal government to insure your reverse mortgage loan.
The Tax Relief and Healthcare Act of 2006, Public Law 109-432 (as amended by The Mortgage Forgiveness Debt Relief Act of 2007, Public Law 110-142), says you may be eligible to deduct a portion of your MIP. Take this card to your accountant and ask them to get you the deduction you may be entitled to.
The law runs out in 2010. So, act now to put some money in your pocket.
Atare E. Agbamu
Needless to say, you will impress not only your Mrs. Bubaskys, but also their accountants and their children.
Think reverse. Move forward!
Author and columnist, Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of the BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse! and more than 100 articles on reverse mortgages. Through his advisory firm, ThinkReverse LLC, Agbamu advises financial professionals, institutions and regulators across the country. In a 2007 national report on reverse mortgages, the AARP cited Agbamu’s work. He can be reached by phone at (612) 436-3711 or (612) 203-9434.
Disclaimer: Nothing in this article should be considered tax advice. It is strictly informational. Consult a reverse mortgage-competent tax advisor.
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