Reverse mortgage interest and a trust

[mmbowm]

My cousin setup a reverse mortgage in early 2024 on my Aunt's home and received a lump sum payment in the amount of $275,000 dollars to fund her dementia care.  These funds were deposited into a high yield savings account.   She passed away in July of 2024.  Her house which she solely owned is now the lone asset held by her trust.  The house was occupied by my cousin and is now listed for sale so family members (beneficiaries in the trust) advanced the funds to pay back the mortgage/Interest in December.

  Questions:

  1.   A 1099 was issued by the bank for interest earned in her SS #.   Should I transfer the income received after       her death and report via the trust?

   2.  Is the interest and fees paid in December fully deductible by the trust?

   3.  The cousin who remained in the house assumed all bills and was responsible for the cleanout and  preparing the home for sale.  Is there any impact on the trust accounting for this?

    4.  Do we need to do a calendar year end return for the trust, or can we do just one final return after the house is sold (providing that its less than one year since her death) ? 

Thanks!

[DianeW777 · Accepted solution]

Answers are noted beside each of your questions.

Questions:

  1.   A 1099 was issued by the bank for interest earned in her SS #.   Should I transfer the income received after  her death and report via the trust?

• Yes. Any interest after death will be reported on the beneficiary(ies) return via the trust return K1s. See how to nominee below.

   2.  Is the interest and fees paid in December fully deductible by the trust?

• Yes, see the allowable deductions in the Form 1041 Instructions

   3.  The cousin who remained in the house assumed all bills and was responsible for the cleanout and  preparing the home for sale.  Is there any impact on the trust accounting for this? 

• It depends.  If the trust pays for any services then they could take the deduction, otherwise there is nothing to report.

    4.  Do we need to do a calendar year end return for the trust, or can we do just one final return after the house is sold (providing that its less than one year since her death) ? 

• Filing requirements for the trust return is gross income of $600.  If there was no income in 2024, the return is not required.

The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a domestic estate that has:

• Gross income for the tax year of $600 or more;
• A beneficiary who is a nonresident alien; or
• If you held a qualified investment in a QOF at any time during the year, you must file your return with Form 8997 attached. 
  • See the Form 8997 instructions.

[mmbowm]

Thank you so much for the expert advice. 

[PoconoRick]

You said "see how to nominee below"  but didn't include any information below. I assume you are referring to the assigning the interest reported to the deceased SS# to the trust EIN number..  This is exactly what I'm trying to do.. Any help?

[NCperson]

@PoconoRick see my response to your other post.

I disagree with the expert that the repayment of the interest on the reverse mortgage is deductible, unless the monthly payments received previously were use to buy, build, or substantially improve the home that secures the loan. 

a reverse mortgage is a type of home equity loan and must follow those rule for interest deductibility. 

[mmbowm]

I used the Turbo Deluxe edition and could not figure a way to add misc comments to the interest transfer.

It may not be correct but I finally ended up showing the adjustment as part of the bank name on schedule B.

I changed the bank name to:  BankName-Post death $xxx trf to Trust EIN xx-xxxxxxx      That printed out and explained why the interest reported on Sch B was less than the 1099 issued.   The return has been processed refund issued,  and no questions yet.  

[wahafhoney]

This is mostly a tax/trust question, but a couple quick points:

• The lump sum from the reverse mortgage isn’t income.

• Interest only becomes deductible when it’s actually paid (like at payoff in December).

• Income earned after her death usually belongs to the estate/trust, not her personally—but timing matters.

This page explains the interest part pretty simply if you want a quick read reverse.mortgage/interest-tax-deduction

For the rest (1099 handling, trust return, deductions), honestly a CPA is the safest move here.

[NCperson]

@wahafhoney this link has been posted previously and it is outdated and WRONG. 

There is no $100,000 limit - that rule ended in 2017.  (even though the article is dated 2021). 

Most proceeds from reverse mortgages are used for daily living expenses. 

And if that is the case, NONE of the interest is tax deductible. 

The interest is deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.  That has been the law since 2018.