Reverse Mortgages and Property Taxes

Reverse Mortgages and Property Taxes
The average HUD trained counselor would answer the question: What effect does a HECM Reverse Mortgage have on property tax? The counselor most often will say no effect, but that one must pay property tax. That statement is partially correct.
However, if one is to look deeper into the question, and consider the total borrower circumstances one will quite often find that the manner in which a borrower integrates the reverse mortgage into the total plan, considering other assets and resources and strategically plan their income sources, they might find that it makes a substantial difference in how the borrower plans his income stream.
To make the point clear, the writer would like to discuss particular taxing districts, as state and county laws are different in different jurisdiction. The writer has his planning practice in the SMA of Seattle, Bellevue in King County Washington, and will address the situation in light of that location.
The median value of a single-family home in 2011 is $348,000.
The median income of a senior is approximately $30,000 per annum including social security.
On average seniors have:
  • 70% of there net worth tied up in there home.
  • $134,000 in 401k, and
  • $15,000 in savings
  • Income
  • $20,400 from social security, and
  • $15,000 drawdown from 401k.
  • Total Income $35,400.
Property Tax in King County approximately 1% of home value, equals $3,480 or approximately 10% of annual income.
Seniors over 62 are eligible for property tax exemption or deferral. Deferral is a loan, payable with interest at a future date. Exemption is tax exempt, levy rate is reduced, and no future payment is due.
The exemption is means tested, and critical income levels are $35,000, $25,000, and $20,000. Deductions from income are allowed for certain non-reimbursed medical expenses.
Now if the above senior were to elect to draw $15,000 from the proceeds of a reverse mortgage instead of the $15,000 from his 401k, his reportable income would be $20,400 instead of $35,400. (Proceeds from a reverse mortgage are not reportable income). This procedure would cut his property tax bill approximately in half. So his property tax would be approx. $1,500, saving approximately $1,500 per year. In addition his property valuation is frozen in the year first qualified. In some cases a taxpayer would only have to pay about $350 per year instead of $3,500.
In addition the tax payer may elect to request a refund for over payment of tax for the past three years. In one case we were able to help a widow in the North Admiral District of West Seattle get a refund of $10,000+.
It is worth note that former King County Assessor Scott Noble, and former King County Executive Ron Sims estimated that 50% of seniors eligible for tax exemption have failed to apply for their exemptions. Likewise Current King County Assessor estimates that approximately 26,000 seniors who would qualify have not made application for their exemption.
If you or your parents believe they may be eligible for the property tax exemption, you might phone the King County Assessor’s office, or John Kennedy at 206-935-9884.



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