In Uncategorized on 11/05/2020 at 16:06

Stanley Michel & Mireille D. Michel, Docket No. 22959-18, filed 11/5/20, took out a reverse mortgage. This is a deal where a senior citizen puts up their appreciated dwelling, but instead of getting a lump sum on the appraised value of the mortgagor’s equity, gets an income stream based thereon, interest accruing, both principal and interest being non-recourse. If mortgagor dies, moves, or sells, principal and accrued interest is due.

Stan & Mireille deduct the interest that accrued in year of issue. Stan & Mireille say “they could deduct the interest that accrued on the reverse mortgage because the promissory note did not say otherwise.” Order, Transcript, at p. 5.

Well, doesn’t Section 163 say “paid or accrued”?

Yes, but.

Section 461 says individuals like Stan & Mireille are cash-basis. Judge Albert G (“Scholar Al”) Lauber man-‘splains: “When a cash basis taxpayer owes interest on a loan and gives the creditor a note to cover the interest, the taxpayer has not paid interest for Federal income tax purposes. That is what petitioners did here, by having the accrued interest on their reverse mortgage added to the principal of the promissory note. Because petitioners are cash basis taxpayers, they may deduct only the mortgage interest they actually paid during [year at issue]…. They cannot deduct the… interest that accrued on their reverse mortgage, because a deduction is allowed only when the interest is actually paid in cash or a cash equivalent.: Order, Transcript, at p. 6.

But Stan & Mireille claim that short-changes them. Since their note runs until 2096, they are concerned that they can never deduct the interest in their lifetimes.

But Reg Section 1.691(b)-1(a) puts that right, although, as with the shotgun guard on the Dover Mail in Mr. Dickens’ two-cities tale, it may not be in their lifetimes.

“That regulation provides that, if a taxpayer dies before a deduction is allowable, either the taxpayer’s estate or the taxpayer’s heirs will be allowed the deduction when the amount is paid. Thus, an interest deduction will be allowed at some point. It is true that this deduction will be deferred, but that is what petitioners opted for when they executed a reverse mortgage rather than a conventional mortgage.” Order, Transcript, at p. 7.

So the mortgage is a reverse, but so is the deduction for the year at issue.


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