The reverse mortgage interest deduction almost never shows up on an annual tax return. Because you don’t make monthly payments, the interest that piles onto your loan balance isn’t considered “paid” for tax purposes, and the IRS applies the same cash-basis rule it applies to any other borrower: no payment, no deduction.1Internal Revenue Service. For Senior Taxpayers The deduction instead lands in a single year, usually when the home is sold or the loan is otherwise paid off, and only the portion of interest tied to money you used to buy, build, or substantially improve the home actually qualifies.
Why You Can’t Deduct It Each Year
A conventional mortgage payment includes interest you write a check for every month. A reverse mortgage runs the other direction: interest is added to your loan balance monthly through negative amortization. Nothing leaves your bank account, so nothing counts as paid.1Internal Revenue Service. For Senior Taxpayers
The rule sits in the general timing principle for cash-method taxpayers, who can deduct an expense only in the year it’s actually disbursed.2Office of the Law Revision Counsel. 26 U.S. Code 461 – General Rule for Taxable Year of Deduction Most individual taxpayers use the cash method. That’s why your lender’s annual statement showing accrued interest isn’t a deduction slip. It’s a record of a growing debt. And it’s why reverse mortgage borrowers typically don’t receive an annual Form 1098 the way conventional mortgage borrowers do.
When the Deduction Actually Hits
The deduction becomes available in the tax year the loan balance is satisfied. For most borrowers that happens through one of three events:
- Sale of the home, where closing proceeds pay off the loan and the total accrued interest is treated as paid that year.
- Refinancing the reverse mortgage, which pays off the old balance at closing.
- Death of the last borrower, which makes the loan due and triggers the deduction in the year whoever settles the debt actually pays it.
In each case the lender issues a final Form 1098 with the total interest paid. That figure often surprises people, because it represents years of compounding. A loan that started at $150,000 and grew at 6 percent for twelve years might generate more than $150,000 in interest by the time it closes.
Voluntary Payments Are the One Exception
You can accelerate the deduction by making a voluntary payment against accrued interest while the loan is still active. Most HECM agreements allow optional payments at any time, and interest you actually pay counts in the year you pay it, provided the other qualification rules below are met. Few borrowers do this, since the point of a reverse mortgage is to avoid monthly payments, but the option is there.
Only Some of the Interest Qualifies
Even after the interest is paid, not all of it is deductible. Since the Tax Cuts and Jobs Act took effect in 2018, home mortgage interest is deductible only if the loan proceeds were used to buy, build, or substantially improve the home securing the loan.3Office of the Law Revision Counsel. 26 USC 163 – Interest The IRS applies this test directly to reverse mortgages.1Internal Revenue Service. For Senior Taxpayers
This is where most borrowers lose the deduction. Money drawn to cover living expenses, medical bills, or general retirement income produces interest that will never be deductible, no matter how large the payoff figure eventually is. Only interest attributable to qualifying home improvements, or to the purchase of the home under a HECM for Purchase, passes the test.
Splitting Mixed Uses
If part of your draw funded a qualifying renovation and part covered daily expenses, the accrued interest must be allocated proportionally. Say your reverse mortgage produced $200,000 in total draws, with $80,000 going to a kitchen renovation and $120,000 to living expenses. Only 40 percent of the accrued interest is deductible. The remaining 60 percent is permanently nondeductible.
The Dollar Cap
Qualifying interest is also subject to the acquisition indebtedness limit. For loans taken out after December 15, 2017, you can deduct interest on up to $750,000 of qualifying mortgage debt ($375,000 for married filing separately). Loans originated before December 16, 2017 are grandfathered at $1 million ($500,000 for married filing separately).4Internal Revenue Service. Publication 936 (2025) – Home Mortgage Interest Deduction
The cap covers total qualifying mortgage debt across your properties, not the reverse mortgage in isolation. A conventional mortgage on a second home is combined with a reverse mortgage on your primary residence when the limit is tested, and interest is scaled back proportionally if the total runs over.
You Have to Itemize for It to Matter
Reverse mortgage interest is claimed on Schedule A.5Internal Revenue Service. Instructions for Schedule A (Form 1040) If your total itemized deductions come in below the standard deduction, itemizing produces no benefit and the interest saves you nothing.
For tax year 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers and married individuals filing separately, and $24,150 for heads of household, with an additional amount for taxpayers 65 and older.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 That said, a lump of accrued reverse mortgage interest from a loan that ran several years typically dwarfs those thresholds by itself, making itemization the clear choice in the payoff year.
When Heirs Pay Off the Loan
When the last borrower dies, the loan becomes due and heirs generally have about six months, with possible extensions, to sell the home or otherwise satisfy the debt. The deduction follows the same principle: whoever actually pays the interest gets the deduction in the year paid. Whether that flows onto the estate’s final return or an heir’s own return depends on who is legally responsible for the debt and how the estate is structured. The dollar figures can be large enough that professional tax help is worth the cost.
One boundary worth knowing: HECM loans are non-recourse, so if the balance exceeds the home’s value, neither the borrower nor the heirs owe the shortfall, and FHA insurance covers the gap.7Consumer Financial Protection Bureau. Can Anyone Take Out a Reverse Mortgage Loan? That forgiven shortfall is not taxable as cancellation-of-debt income; the IRS treats the transaction as a property disposition instead.8Internal Revenue Service. Publication 4681 (2025) – Canceled Debts, Foreclosures, Repossessions, and Abandonments
Mortgage Insurance Premiums
Every HECM carries FHA mortgage insurance: an upfront premium at closing and an ongoing annual premium that accrues monthly. Both are usually rolled into the loan balance rather than paid in cash.
For tax years beginning after 2025, the One Big Beautiful Bill Act made the deduction for qualifying mortgage insurance premiums permanent, and it is claimed as mortgage interest on Schedule A.3Office of the Law Revision Counsel. 26 USC 163 – Interest There is an income limit: the deduction phases out 10 percent for each $1,000 of adjusted gross income above $100,000 ($50,000 for married filing separately) and disappears entirely at $109,000 ($54,500 for married filing separately). Those thresholds are not indexed for inflation.
Timing works the same way as the interest itself. Ongoing annual premiums that accrue onto your balance aren’t deductible until the loan is repaid. The upfront premium must be spread over the shorter of the loan term or 84 months, beginning with the month coverage started, and because reverse mortgages have no fixed term the 84-month period generally applies.9Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction If the upfront premium was financed into the loan, any remaining unamortized portion becomes deductible in the year the loan is repaid.
Origination Fees and Other Closing Costs
Origination fees, or points, can be treated as prepaid interest if they represent a charge for the use of money rather than a flat administrative fee. Points paid in cash at closing may be deductible; points financed into the loan get spread over the expected life of the loan, with the remainder falling into the payoff-year deduction.
Most other closing costs don’t help you on Schedule A. Appraisal fees, title insurance, document preparation, and credit report charges are costs of obtaining the loan, not payment for borrowed money, so they add to your cost basis in the home rather than producing an interest deduction. Monthly servicing fees are nondeductible personal expenses. The final Form 1098 you receive at payoff will show only the deductible interest figure, not these administrative charges.
Documentation to Keep Now
The most valuable thing you can do to protect the eventual deduction is document how each dollar of reverse mortgage proceeds was spent. The IRS won’t assume the money went to home improvements. You have to show it. Keep contractor agreements, invoices, building permits, before-and-after photographs, and bank statements tracing each draw to what it funded.
If a lump-sum draw covered both a qualifying renovation and general expenses, reconstruct the split now rather than a decade from now when the loan closes. That allocation determines how much of the accrued interest survives the use-of-proceeds test, and for borrowers whose heirs will be handling the paperwork, a clean paper trail can be the difference between claiming the deduction and losing it entirely.