As Continuing Care Retirement Communities (CCRC) continue to expand and evolve to care for the baby boomers, the spotlight will continue to shine on entrance fees. The big question is whether or not these large, sometimes six figure entrance fees, are tax deductible. It is important to ask the right questions with the CCRC and then collaborate with your tax adviser to make the best decision possible when selecting the CCRC of your choice.
So what are the important questions to ask? There are three main types of contracts at CCRCs.
- Type A is called a “Life Care Contract”. These types of contracts offer care for increasing levels of medical care at the same monthly fee baring costs of inflation.
- Type B or “Modified Contracts” offer some period of free medical care often 60–90 free days when accessed. After this period the resident would be required to pay higher monthly fees based on the level of care.
- Type C or “Pay as you Go Contracts” offer no advance medical care as a portion of their monthly fees so residents are expected to pay for these services as incurred. With regard to monthly fees, only Type A contracts are eligible for medical deductions while in independent living.
But what about entrance fees? The tax court has made it clear that any refundable portion of entrance fees are not tax deductible and are looked at by the IRS as below market interest rate loans. In plans where 90% is refundable the remaining 10% or founders fee is often deductible as an advance medical payment.
Non refundable entrance fees are tax deductible in full by Type A contracts. For Type B contracts the free days are tax deductible as well as a portion of the entrance fee. For Type C contracts only a portion of the entrance fee is tax deductible. The key word for a tax deduction is clearly non-refundable fees. The portion deductible is determined by the percentage of annual operating costs used for medical care at the community. For entrance fees with a declining percentage refund over a period of time, residents will need to report the refund as income if they previously deducted the entrance fee.
To be sure what impact your entrance fee will have on your tax return, seek advice from both the CCRC and from your tax adviser. Since many tax advisers may not be familiar with these types of deductions, they can refer to the 2004 U.S. Tax Court decision of Delbert L. Baker v. Commissioner or the IRS court case Finzer v. United States.