1. Are the rules different regarding foreclosure of a reverse mortgage?
A. If a reverse mortgage ends in a foreclosure, the rules are the same as regular mortgage foreclosures.
2. Those implications, if any, for the borrower of a reverse mortgage in foreclosure?
A. The foreclosure results in a realized gain to the borrower to the extent that the debt forgiven exceeds the adjusted basis in the property. If a loss results, the residence is a personal asset, and losses on personal assets are not allowed. For a qualified residence, realized gains up to $500,000 for married taxpayers ($250,000 for singles) are excluded for tax purposes. The home must have been the principal residence of the taxpayer for at least two out of the last five years before the foreclosure.
3. Has the Internal Revenue Service (IRS) allowed the long-term care component to be eligible for tax-qualified status?
A. No. The Internal Revenue Service (IRS) has refused to allow the long-term component to be eligible for qualified status by treating it as a contract separate from the annuity component.
4. Has this refusal of the Internal Revenue Service (IRS) affected long-term care-annuity combinations?
A. Yes. Since annuities are used to provide retirement income and hence are the logical platform to pair with long-term care coverage, particularly where life insurance is not needed.
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