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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29580
Experience:  Taxes, Immigration, Labor Relations
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We recently received a modest loan modification on our first

Customer Question

We recently received a modest loan modification on our first mortgage. Our interest rate was reduced from 6.5% to 5.375% for four years, and the amount we had been in arrears was added as interest-free principal to our original loan amount. The bank has made "adjustments" to our account, so it now shows we are current and making a lower payment each month. A portion of those "adjustments" have shown up as payments to our escrow account; however, it is unclear whether the bulk of the adjustment will be considered interest paid and included on our 1099 for 2010.
I believe that wrapping the past due payments into the original loan as new principal is effectively like taking out a new loan to make the past due mortgage payments. Therefore, the amount that was adjusted to bring the account current should be considered payment of interest and should be deductible. However, no one at the bank can either confirm or deny this. In order to properly plan our withholdings for the rest of the year, I need to know whether our mortgage interest tax deduction will be $50,000 or $20,000. Could you please help.

Thank you.

Submitted: 7 years ago.
Category: Tax
Expert:  Lev replied 7 years ago.

The situation when the interest in added to principal - as "adjustments" is referred as a reversed mortgage.


Please see for reference IRS publication 936 -

A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt.


So your mortgage may be viewed partly as conventional mortgage and partly as reserved mortgage. Thus - the interest which was accrued but was not actually paid is not deductible until you actually pay it.


Sorry if you expected a different answer.

Let me know if you need any help.