Can I Deduct Reverse Mortgage Interest Paid After Inheriting a Home?

This is actually a complex situation with reverse mortgages and inheritance. When you inherit a property with a reverse mortgage, you're essentially stepping into a unique tax situation. The IRS is applying the mortgage interest deduction limits here. For tax years after 2017, you can generally only deduct interest on up to $750,000 of qualified residence debt. However, the bigger issue is that to claim mortgage interest, you typically need to be legally obligated on the loan. Since the reverse mortgage was in your uncle's name and not yours, the IRS position is that you weren't legally obligated to pay that debt - you chose to pay it to keep the property rather than letting it go to foreclosure. From their perspective, you were essentially paying someone else's debt, which is why they're limiting your deduction. You might have an argument that by accepting the inheritance and paying off the loan, you "stepped into the shoes" of the deceased, but this is a technical tax law area.

I had a similar situation with my mom's reverse mortgage. After going in circles with the IRS, I finally used taxr.ai to analyze all my documents. It's specifically designed for complex tax situations like this where the IRS and taxpayers disagree about deduction amounts. I uploaded the 1098, the inheritance documents, and the HUD payoff statement to https://taxr.ai and it found several precedent cases where heirs were able to deduct a portion of the interest based on specific IRS code provisions I hadn't known about. The analysis helped me understand exactly what part of the interest was legally deductible and what wasn't. The tool also helped me draft a response to the IRS with the right technical language and citations. Saved me from having to pay a tax attorney thousands just to tell me the same thing.

I was definitely skeptical about AI tax tools, but I decided to try taxr.ai for my own inherited property situation. I uploaded my documents including the 1098 and property transfer paperwork, and it actually provided really specific guidance. The analysis showed that while I couldn't deduct the full interest amount as my accountant had claimed, I was entitled to deduct the portion that represented interest accrued after I took legal ownership. The tool cited specific tax court cases involving inherited properties with existing mortgages. What impressed me was that it didn't just give a yes/no answer - it explained the legal reasoning and even helped me understand how to document my position properly. I'm still working through my audit, but having clear documentation of the legal basis for my partial deduction has made a huge difference in my communications with the IRS.

I had a nightmare trying to reach someone at the IRS about a similar inheritance tax issue. After 12+ calls and hours on hold, I found this service called Claimyr that got me through to an actual IRS agent in about 20 minutes. You just enter your phone number at https://claimyr.com and they navigate the IRS phone system for you, then call you when they've got an agent on the line. They also have a demo video of how it works: https://youtu.be/_kiP6q8DX5c Since your case is pretty complex and involves a significant amount of money, talking directly with an IRS representative might help clarify what documentation they need and whether there's a specific form or process for your situation. The agent I spoke with actually explained that in inheritance cases, there's sometimes additional paperwork they need that isn't initially requested in the audit letter.

Ok, I owe everyone an apology. After posting that skeptical comment, I decided to try Claimyr anyway because I was desperate to resolve my own tax issue. I've been trying to reach the IRS for WEEKS about an incorrect 1099-R distribution that triggered an audit. I was absolutely shocked when my phone rang about 15 minutes after using the service, and there was an actual IRS representative on the line! No waiting, no automated system - just a real person ready to help. I explained my situation, and the agent was able to put notes in my file about the documentation I was sending. The agent also explained that for inheritance cases like the original poster's, there's a specific procedure for handling reverse mortgage interest deductions that doesn't appear in the standard audit letters. Having that conversation probably saved me thousands in incorrect tax assessments. I still can't believe how easy it was after weeks of frustration.

You should definitely consult with a tax attorney at this point. The amount at stake ($32K) justifies the expense. Most tax attorneys will do an initial consultation for free or a small fee. The key issue here is whether you, as the heir, stepped into the shoes of the original borrower for tax purposes when you paid off the reverse mortgage. There are specific IRS rules about acquisition indebtedness versus home equity indebtedness that affect how much interest you can deduct. Also, the timing matters - when exactly did you inherit the property versus when you paid off the loan? Did you use the home as your primary residence after inheriting it? These factors all affect your deduction eligibility.

Has anyone considered that this might actually be treated as part of the property's basis adjustment? When you inherit property, you generally get a stepped-up basis to fair market value at date of death. But inheriting property with a reverse mortgage is complicated. You might want to argue that part of what you paid was actually acquiring the property (increasing your basis) rather than deductible interest. This might not save you on current taxes but could reduce capital gains if you ever sell.

I went through something very similar when I inherited my grandmother's home with a HECM reverse mortgage. The IRS initially disallowed most of my interest deduction, but I was able to get it partially resolved. The key issue is that with reverse mortgages, the "interest" on your 1098 includes both actual interest charges AND the mortgage insurance premiums that accumulated over the life of the loan. The IRS will generally allow you to deduct the actual interest portion that accrued after you became the legal owner, but not the accumulated MIP or interest that built up before inheritance. You'll need to request a detailed payoff statement from the servicer that breaks down exactly what portion was principal, accrued interest, and MIP. In my case, about 60% of what showed on the 1098 was actually deductible once we separated out the components properly. Also, since you established it as your primary residence before paying off the loan, you have a much stronger argument for the acquisition indeductedness treatment that others mentioned. Document everything - when probate closed, when you moved in, utility transfers, voter registration changes, etc. This timeline is crucial for your case. The $32K they're claiming seems excessive unless there are penalties involved. You might want to request penalty abatement if your tax preparer gave you reasonable advice about the deduction.