Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 9

U.S. Federal Income Tax Aspects of Reverse Mortgages

Micah Bloomfield Partner, Stroock & Stroock & Lavan LLP

 

 

 

 

Reverse mortgages are subject to a number of special provisions under the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that generally are not applicable to traditional residential mortgage loans. The differences in tax treatment affect both the borrowers under reverse mortgages and the financial institutions that provide capital to fund these loans. Borrowers are likely to have a far harder time securing a deduction for reverse mortgage interest than interest on a traditional mortgage. This is because reverse mortgage interest is subject to significantly more stringent deductibility restrictions than interest on traditional residential mortgages. These restrictions affect both the amount and the timing of reverse mortgage interest deductions and, in the case of many borrowers, are likely to significantly impair the after tax economic utility of the deductions.

In addition to restrictions on deductibility of interest, reverse mortgage loans are subject to unique rules governing their use in securitizations involving real estate mortgage investment conduits (“REMICs”). Until recently, the REMIC rules did not permit reverse mortgage loans to be used in REMIC securitizations. Although these restrictions were removed by the American Jobs Creation Act of 2004 (P.L. 108-357) (the “Jobs Act”), the modified REMIC rules are likely to present potential ...