HECM % Deductions & New Tax Law

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Some HECM interest deductions no longer allowed

Under the thin veneer of emotion lies the truth. What is the truth about home equity interest deductions versus mortgage interest deductions? The fact is home mortgage interest is still deductible but interest paid on home equity loans (HELOCs and some 2nd mortgages) are no longer deductible. Those with existing mortgages can still deduct the interest charged on up to $1 million financed. New home buyers are now limited to deducting interest on mortgages up to $750,000. Does this sound awful? It may be if you’re a higher net worth individual who will be purchasing a home over $750,000.

Reverse mortgage interest is deductible in many circumstances. However, there are some cases when it is not.

The Home Equity Conversion Mortgage is a mortgage in the truest sense, albeit a unique one. With no required monthly payments the HECM is a neg-am or negative amortization loan…

Download this week’s transcript here



Dan Olofsson January 22, 2018 at 5:17 am

Can you write off HECM mortgage interest if filing taxes on an accrual basis?

Shannon Hicks January 22, 2018 at 7:02 am

Dan, As we understand it, mortgage interest is only deductible when paid. Great question. Perhaps one of our former CPA’s can chime in as well.

James E. Veale, CPA, MBT January 27, 2018 at 1:36 pm

Mr. Olofsson,

You can, IF the taxpayer is on the accrual method of accounting for THAT specific type of deduction. Here again one must be careful when the proceeds were loaned to an entity to which IRC Section 267(a)(2) applies.

Revenue Ruling 80-248, the only IRS primary authority specifically addressing reverse mortgages, applies to those who are required to report and deduct reverse mortgage interest on the cash method of accounting.

When looking into the matter the Internal Revenue Code Regulations on Internal Revenue Code Section 163(h)(3) are crucial as to understanding how the interest deduction works when the loan has as its sole collateral, the principal residence of the home.

Also as Mr. Barry Sacks describes in his article on the deduction of interest on a reverse mortgage, if the deduction is as home mortgage interest, several limitations apply. See his article at the Journal of Taxation website at:


As to the Sacks article two cavets should be placed on it. First, it was written before the latest changes to Internal Revenue Code Section 163(h)(3) as enacted in Section 11043(a) of Public Law 115-97 (aka the Tax Act of 2017 and the Tax Cuts and Jobs Act of 2017). Second, there are a few points which I disagree with the authors.

The deduction can be tricky. For example, interest on proceeds used to purchase a different home (like a second home) are not deductible as interest on acquisition indebtedness since the new home is NOT collateral on the reverse mortgage.

Tom Perkins January 22, 2018 at 8:06 am

Last year I paid off an existing RM and the interest I paid was about $200,000 can I write off that amount ?

James E. Veale, CPA, MBT January 27, 2018 at 1:44 pm

Mr. Perkins,


The trouble is you have not provided any information on how proceeds were used from the reverse mortgage and if the debt was refinanced how the proceeds on the refinanced portion of the refinanced loan were classified and what the total of balance due on the existing loan was at the time of payoff and what the balance due of the new loan was at the time of its closing, presumably on the same day.

None of the interest maybe deductible or even up to all of it can be depending on the facts and circumstances related to that loan and any debt that was refinaced through the reverse mortgage.

The tax law on mortgage interest fundamentally changed during 1987 and related regulations along with it. Before 1988, the deduction for home mortgage interest was generally a fairly straight forward proposition. After 1987, that is no longer the case.

For a somewhat more thorough answer see my response to Mr. Olofsson above.

Scott Alexander January 23, 2018 at 8:48 am

Did the question actually get answered? Can reverse mortgage interest be deducted AFTER it is actually paid under the new tax laws? Maybe Im missing something but watched it twice and still didnt see an answer. Probably me! LOL.

Shannon Hicks January 23, 2018 at 11:29 am

Scott, As we understand it once the HECM is terminated all interest paid from the refinance of an existing mortgage or a purchase transaction would be deductible under the new tax law. That said, each borrower should seek the advice of a tax professional. The real rub it that the new tax law no longer allows for the deduction of interest for ‘home equity loans’, such as HELOCs. This new elimination of the ‘home equity’ loan tax deduction could be problematic for those who may wish to deduct interest charged on monies drawn from the HECM’s line of credit.

John A. Smaldone January 24, 2018 at 12:48 pm


This was a great subject to talk about, especially for this time of the year.

Scott Alexander asked a good question and you answered it properly.

The strange part of this is that I have received different answers from different CPA’s.

I understand the the new tax law as you explained it. However, because of the various interpretations, is this saying the new tax laws have some ambiguities to it?


James E. Veale, CPA, MBT January 27, 2018 at 8:41 pm


There are few ambiquities in the new tax law when it comes to home mortgage interest deductions. The ambiquities are those which existed before the Tax Act of 2017 and remain.

The deduction of interest now as before the new tax law has nothing to do with the name of the product such home equity mortgage or HELOC. Interest deductibility is governed by how the underlying proceeds were used.

If a HELOC was taken out and all of the proceeds were used to substantially improve the home (such as a brand new kitchen), the interest on the proceeds used on improvements that are considered part of the real property in the home would be fully available for deduction if the proceeds meeting the acquisition indebtedness definition also met the limitations on the proceeds which can be utilized for this purpose.

The rules are complicated as can be seen in my response to the question from Mr. Olofsson above. Those not trained in income tax research have a very difficult time in analyzing these provisions. Even many IRS auditors have difficulty in these issues for good reason in that there are no clear answers to some issues.


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