The deductibility of reverse mortgage interest follows the same limits as conventional loans except the deduction is limited to what would have been deductible each year if the borrower had paid it and accrues until the loan is paid off, at which time it becomes deductible.

Bad news! Unless the reverse mortgage included some portion that was used to refinance an existing acquisition loan, all the interest will be equity interest, and thanks to TCJA, the deduction for equity debt interest is suspended through 2025.

We generally think of a reverse mortgage as providing for the living expenses of the taxpayers. As we have learned in taxes, always expect the unexpected. The tracing rules apply as with any debt and character of the debt is determined by the use of the funds. Making the assumption that the use is all personal and the interest non-deductible may not be correct. Who knows, the taxpayer may be using the proceeds for his business or investments.

So, tax preparers must be on the lookout for the existence of:

Accrued reverse mortgage interest paid after the decedent’s death is allowable as a deduction in respect of a decedent (DRD), deductible under Sec 691(b) either by the estate or by the beneficiary. If the estate is not liable for the obligation, then the person who inherits the property from the estate (subject to the obligation) is entitled to the deduction (Sec 691(b)(1)(B)).