Question: I have a reverse mortgage on my house. If I sell the house, do I need to pay tax on it?
Answer: Reverse mortgage, simply speaking, is allow you to take equity out of your residence without having to make monthly payments. Instead, the interest keeps accumulating and decreases your remaining equity on the house.
The money you received from the reverse mortgage is considered a loan proceeds therefore is tax free. Since you do not pay any interest on the reverse mortgage, you do not get to deduct any interest. However, when you eventually pay off the loan, you can deduct all accrued interest (with limit) and mortgage insurance.
The tax implication to sell a house with reverse mortgage is the similar as you sell any regular home. If you qualify for home sale exclusion, you might have home gain exclusion up to 500k. Anything over that is taxable as capital gain.
Keep in mind the accrued interest and mortgage insurance can be quite large when you sell the house with reverse mortgage. Proper planning is needed to make sure those deduction are not lost.
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Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.