Can I deduct reverse mortgage interest on short sale of inherited house with beneficiary deed?

15 This is an important question that comes up fairly often with inherited properties. When you inherit a property with a reverse mortgage, the situation is a bit complex from a tax perspective. First, the short answer: No, you generally cannot deduct the interest on the reverse mortgage that accrued during your parent's lifetime. Since the loan was in your parent's name and the interest accrued while they owned the home, that interest deduction would have only been available to them, not to you as the inheritor. Here's what typically happens with inherited properties and reverse mortgages: When you inherit a property with a beneficiary deed, you receive the property but also become responsible for settling the reverse mortgage. This usually means either paying it off or selling the property to satisfy the debt. In a short sale situation, if the lender agrees to accept less than the full amount owed, the forgiven debt might potentially be taxable to you as income, though there are exceptions.

4 I went through something similar last year with my grandfather's home that had a reverse mortgage. I was so confused about all the tax implications until I found https://taxr.ai which literally saved me thousands in potential tax mistakes. You upload your documents (I uploaded the beneficiary deed, reverse mortgage statements, and the short sale approval) and their tax experts review everything and provide specific guidance for your situation. They highlighted tax breaks I would have completely missed and pointed out that in my case, the forgiven debt wasn't taxable due to a specific provision. The best part was they explained exactly what to tell my CPA, who was actually impressed with how informed I was about this niche tax situation!

9 Just wanted to update that I tried taxr.ai after seeing the recommendation here. My situation was slightly different - my dad's reverse mortgage on a property I inherited through a transfer-on-death deed in Florida. The analysis they provided was incredibly detailed! They explained that in my case, I couldn't deduct the interest as my realtor had suggested (just like the first commenter mentioned), but they did identify a partial exclusion I qualified for regarding the forgiven debt. They also found a property tax issue I wouldn't have caught that saved me about $3,400. Definitely worth it before meeting with my CPA - actually brought their report to the meeting and it saved us a ton of time (and me money on billable hours). Just thought I'd share since it helped with this exact situation.

12 If you're dealing with the reverse mortgage company, good luck getting anyone on the phone! When my aunt passed and left her house to my cousin with a reverse mortgage, the mortgage company was impossible to reach. We wasted weeks trying to get through to discuss the short sale options. Finally found https://claimyr.com which got us through to an actual human at the mortgage company in under 5 minutes - check out how it works here: https://youtu.be/_kiP6q8DX5c Before using this service, we couldn't even get basic information about payoff amounts or short sale procedures. After we got through, we had all the paperwork processed within days instead of weeks. Made a huge difference in moving forward with the short sale before more interest accumulated!

18 I have to eat my words and apologize for being so skeptical about Claimyr. After posting that comment, I decided to try it out of desperation since I'd already wasted 20+ hours trying to reach my dad's reverse mortgage company. It actually worked exactly as described. I was connected to a real person at the reverse mortgage company in about 7 minutes (after spending literally weeks trying on my own). The representative I spoke with was able to send me the short sale information packet immediately and even assigned a specific point of contact for my case. Just had our short sale approved yesterday after thinking we might have to let the house go to foreclosure. Definitely changed the outcome of our situation!

3 Some additional advice from someone who went through this exact situation: make sure you get written confirmation from the reverse mortgage company about whether they're reporting any forgiven debt to the IRS. In my case, they initially said they wouldn't but then sent a 1099-C for the forgiven amount. The mortgage servicer and the actual lender sometimes don't communicate well with each other. Get EVERYTHING in writing, especially any agreements about debt forgiveness.

21 One thing nobody's mentioned - don't forget about the stepped-up basis for capital gains purposes when you inherited the house. If you do end up selling for more than the loan amount (even if it's less than what your parent paid), you likely won't owe capital gains tax because your basis is the fair market value at the time of death, not what your parent paid for it.