Residents of continuing care retirement communities (CCRCs) may take a medical expense deduction for a significant portion of both their entrance fee and monthly fees.  For the entrance fee, this usually results in a large medical expense deduction in the year the fee is paid.  In the first part of the article, we track the history of the CCRC medical expense deduction and examine its tax effects on residents of independent living, assisted living, and nursing care units.

Many CCRCs agree to refund a portion or all of the entrance fee without interest when the resident moves out or dies.  In the second part of the article, we examine two potentially significant tax effects of a guaranteed refund.  First, the refund may be subject to the below-market-rate loan rules and as such may produce imputed interest income for the resident and interest expense for the CCRC.   Second, the refund may reduce the deductible amount of the medical portion of the entrance fee.

Finally, CCRCs are responsible for accurately informing their residents as to the deductible medical portion of the fees.  The computational methods used in practice – the expense category method and the actuarial method – are often inconsistently or illogically applied, resulting in advice that shortchanges the residents and is open to IRS challenge.  In the third part of the article, we critique the two methods and recommend that CCRCs use the expense category method to determine the deductible portion of the monthly fees and the actuarial method for entrance fees.

See full article.