CCRC entrance fees may qualify for a medical deduction in payment year

A portion of an entrance fee paid to a continuing care retirement community may qualify as prepaid medical care for tax purposes in the year the payment is made, even if the resident has not yet used medical services.

The treatment applies to the part of the fee allocated to future nursing, assisted living and other medical care. Amounts attributable to accommodation, meals and amenities are not deductible. Allocations vary by community and contract type, including Type A, Type B and Type C arrangements.

The Internal Revenue Service’s position is linked to Internal Revenue Code Section 213, related revenue rulings and Publication 502’s discussion of lifetime-care advance payments. Only taxpayers who itemise deductions may claim the expense, and qualifying medical costs must exceed 7.5 per cent of adjusted gross income.

A $400,000 entrance fee with a 30 per cent medical allocation would produce a $120,000 medical allocation, but the example is illustrative rather than a standard outcome. Taxpayers should obtain a written allocation statement from the community and retain it with their records.

Portions of subsequent monthly service fees may also qualify, depending on the contract and current IRS guidance. Refundable fees may create recapture issues if money is later returned, while changes to a community’s allocation method may affect future deductions.

The source advises coordinating the payment year with a Roth conversion, retirement-account withdrawal or capital gains event, but says taxpayers should confirm the treatment with a qualified tax professional familiar with CCRC contracts.