The Tax Benefits of Joining a CCRC
- Type A Life Care/Extensive Contract
- Type B Modified Contract
- Type C Fee-for-Service Contract
- Calculating Tax Benefits
Continuing care retirement communities or CCRCs adapt to aging residents’ changing mobility and health needs, but this peace of mind comes with a cost. CCRC tax benefits can offset the costs of entrance and monthly fees.
CCRC residents can deduct portions of their non-refundable entrance fees and monthly fees in excess of 7.5% of adjusted gross income (AGI) as prepaid medical expenses. (IRS Revenue Rulings 67-185, 75-302 and 76-481).
To qualify for this deduction, residents must sign a lifelong care contract with a CCRC. CCRC benefits and tax advantages depend on the type of contract (A, B or C), and each facility uses only one type.
Type A - Life Care/Extensive Contract
This type of contract requires a substantial entrance fee, which may include a refundable portion that returns to the resident’s estate or beneficiary. Residents also pay a monthly fee in exchange for guaranteed lifetime occupancy in an independent living unit and certain services and amenities. If residents require assisted living or skilled nursing care, they can transfer without increasing their monthly fee. Spouses may remain in the independent living unit at the same fee. Monthly fees may vary according to inflation and costs, but fees are unrelated to a resident’s use of care and services.
- Tax Advantages—Portions of the non-refundable entrance fee and unreimbursed monthly fee in excess of 7.5% of AGI are deductible. Because entrance fees are large, residents can maximize their deductions the first year. However, by calculating the cost of medical care to the CCRC overall, taxpayers may have trouble exceeding the 7.5% of AGI minimum.
Type B - Modified Contract
In this type of contract the resident pays a refundable (to the estate or beneficiary) upfront fee and an on-going monthly fee for the right to lifetime occupancy in an independent living unit, with certain services and amenities. Type B differs from Type A in that the CCRC must provide assisted living or nursing care only for a limited period of time (30-60 days) or at a discounted rate indefinitely. Monthly fees increase with level of care. At this writing, undiscounted monthly rates range from $5,000 to $9,000 per month. The spouse continuing in independent living would also pay a monthly fee.
- Tax Advantages—Residents get no tax deduction for refundable entrance fees, which the tax code treats as below-market-rate loans. However, residents can deduct the portion of unreimbursed monthly fees related to CCRC medical expenses. If residents use this deduction while in independent living, they cannot also deduct 100% of those fees when in assisted living or skilled nursing.
Type C - Fee-for-Service Contract
Fee-for-service contracts may require an entrance fee, but discounted health care or assisted living services are excluded, and monthly fees increase with level of care. If and when heath care needs change, residents would pay regular per diem rates.
- Tax Advantages—As with A and B contracts, residents can deduct part of any non-refundable entrance fee and unreimbursed monthly fees related to medical expenses. As with Type B, residents cannot deduct 100% of these monthly fees if they deducted them previously when in independent living.
Calculating Tax Benefits
To calculate your deductible, ask the facility for a statement of annual operating costs, and use the percentage allocated to medical care. This percentage will be the same for all residents, regardless of level of care. The American Senior Housing Association Special Brief, “Key Tax Benefits for Seniors Housing Residents” (2008), found that usually 30% or more of CCRC operating expenses go toward medical care.
Although CCRCs are responsible for giving residents accurate information, the resident alone answers to the IRS. According to the Journal of Taxation (2007), establishing the correct figure is tricky. Experts strongly suggest using a tax adviser and asking for CCRC supporting documentation and annual expense reports. When deciding how to invest in retirement and long-term care options, seniors should consult with attorneys and/or financial counselors before signing any contracts.
Written by senior housing writer Lisa Logan, PhD.