Many of my elder care plans are related to choosing the right retirement community. Some of those communities are continuing care retirement communities, also known as CCRCs. A CCRC differs from traditional retirement communities in a handful of ways:
- They tend to be on a larger campus-like setting.
- Residents are generally offered more clubs, trips and amenities (like a pool).
- They target independent seniors who don’t immediately need elder-care services.
- Once care is needed, residents can find not only assisted living and memory care on campus, but often rehab and skilled-care services as well.
- They generally have a large “buy-in” which for some can immediately determine the affordability of this option. The terms of the buy-in vary between each community.
- Because seniors are “buying-in,” they usually have the opportunity to customize their apartment by choosing preferred flooring, paint color, countertop, window treatments and more prior to move-in. (This somewhat depends on their willingness to pay extra and the condition of existing materials.)
Although many people refer to the upfront fee as a “buy-in,” it’s also described as an entry fee or deposit. I put the term in quotes because residents actually lease the unit, they don’t buy it.
Generally, if any refund is due it’s based on what was paid in, not the unit’s eventual value. The timing of any refund may be delayed until the unit is fully vacated and leased to a new resident.
Now that we’ve covered what a CCRC is, I’m going to discuss how your clients may be able to save a bit on taxes if they’re considering this style of community. Notably, they may potentially be able to deduct a portion of the initial buy-in and ongoing rent.
I’ve looked at many CCRCs locally and throughout the country. While they are roughly the same as described above, they all differ a bit in how they eventually deliver and charge for care. This is the first determination for tax-deductibility. The second determination is related to each resident’s own financial circumstances.
How CCRCs deliver and charge for care
Here are three examples of how care may be delivered in different communities:
Independent arrangements
Some communities focus on accommodating independent seniors. Should these seniors require care at a later date, they simply use one of the CCRC’s contracted home-care agencies and pay an hourly rate to “age-in-place” within their independent unit. It’s not much different than having remained at home, except that the unit and campus amenities may be more manageable and convenient compared to a private residence.
This example would not meet the first hurdle of CCRC tax-deductibility, which requires the community to count some portion of the buy-in fee as a pre-paid healthcare expense. In this case, the buy-in fee would only be tied to the cost of living in the CCRC. The resident would be 100% responsible for their eventual care needs because they have not pre-paid anything toward this. The same would be true for any ongoing rent paid.
However, according to what I’ve found, the silver lining in communities of this style is that they have the lowest buy-in and rent compared to communities that provide onsite care offerings.
Moving to market-rate care
In a different type of CCRC, a senior may pay a buy-in and ongoing rent (let’s say $3,000/month), but when the time comes for care they move out of the independent unit to an onsite assisted living, memory, rehab, or skilled-care unit. At that time, their rent increases to market-rate (let’s say $10,000/month), meaning that the resident is paying about the same as they would have if they had moved directly into a non-CCRC assisted living community. Again, they have not pre-paid for any care and are paying the full cost at the time of service. There is nothing to deduct from the buy-in fee or from their annual rent.
‘LifeCare’ setups
In this example, seniors pay a buy-in and monthly rent, both of which may seem higher than alternatives they’ve considered. Let’s say $5,000/month for rent. You may also notice the term “LifeCare” on the community’s site and paperwork. The director explains that should a resident later need the skilled-care (nursing home) section, the rent will remain the same. And if they need assisted/memory living options, the rent only goes up marginally, from $5,000 to $6,000. That’s because through the buy-in and ongoing rent, the resident has pre-paid for eventual eldercare.
The “LifeCare” style communities are often considered an alternative to long-term care insurance, with the higher buy-in and rent akin to premiums and the payout being the lower care expense. You’ve now met the first hurdle to deduct a portion of buy-in and rent.
What to consider
As mentioned above, the buy-in terms for communities vary across the board, even within LifeCare communities. Many CCRCs issue a 90% refund of the buy-in when a resident moves out or passes on. Residents fill out paperwork so the community knows where to direct refunds (to the estate, kids or spouse). Other communities may have a different percentage, offer no refund at all, or amortize the refund over time (i.e., a percentage per month until it’s completely gone). Only non-refundable portions of the entry fee can be used for tax-deduction purposes.
So in what I consider to be the most popular buy-in refund amount, 90%, only 10% can be considered for the deduction which will again be multiplied by a percentage that’s considered to be related to care-prepayment. Any refundable portion of the entry fee should not be counted in the formula to determine the deductible amount. If a resident deducts any portion of the entry fee that is eventually refunded via a return of capital contract, then the refundable portion could be taxed as income.
As for ongoing rent, the percentage of each month’s payment that is deductible is often about the same percentage that applies to the non-refundable portion of the buy-in. So how do you even know what the percentage is? Most often the CCRC will issue an annual letter with a recommended percentage and written explanation which can be handed off to a tax preparer. A deduction equivalent to 20% to 40% is not uncommon for LifeCare contracts. See these samples of issued letters for service fees and entrance fees.
The second hurdle: your client’s financial situation
Pre-paying for care via CCRC buy-in and rent are considered a medical deduction, plain and simple. So, our ability to take the deduction depends on our financial circumstances. Medical deductions are itemized deductions, and most tax filers use a standard deduction because it’s historically high and less complicated.
The standard deduction in 2023 for individuals is $13,850; heads of households, $20,800; and married filing jointly, $27,700. Those age 65+ can claim an additional deduction anywhere between $1,500 and $3,700; the amount depends on whether or not the taxpayer is blind and filing as single, head of household or married.
Another thing to keep in mind is that taxpayers can only itemize medical expenses to the extent they exceed 7.5% of their adjusted gross income (AGI).
Let’s use an example:
A single person buys into a CCRC on January 1 for an upfront cost of $450,000. Rent is $5,000/mo. The buy-in is 90% refundable, making only 10% of the buy-in ($45,000) eligible toward the deduction calculation. The resident’s AGI is $150,000 and she has been taking a standard deduction. The CCRC says that 30% of the buy-in and rent are deductible as a medical expense.
To calculate the deductible medical expense, we add the refundable portion of the buy-in and the total rent paid for the year, and then multiple this by the 30% which the CCRC deems medical pre-payment: [($45,000 + $60,000) x 30% = $31,500.] Next we subtract $11,250, which is the 7.5% medical threshold on the resident’s AIG of $150,000. This leaves our resident with $20,250 to use as a deduction.
Comparing deductions
A single person can take a standard deduction of $13,850, plus at least $1,500 for being 65+; which makes itemizing $20,250 a good deal comparatively. However, if this person was head of household or married, the standard deduction would win out. And even if the cost of rent or buy-in were a bit more for a couple, the AGI may be that much higher due to two Social Security checks, pensions, etc, — which would make the 7.5% medical threshold also that much higher.
Also bear in mind that this example is based in Year 1, the year of the buy-in. In Year 2, the resident will only have rent to deduct, which makes itemizing very unlikely.
When children help
As an aside, if adult children pay the buy-in, or some portion of it, they may be entitled to take a tax deduction. However, other factors must also be considered, including the total amount of financial support they provide for their parents.
So when might a tax deduction work out?
Here are six scenarios under which it can be feasible to take a tax deduction with a CCRC:
- You’re looking at a LifeCare community where rent expense remains relatively stable, even after care services are provided.
- If you’re single. That’s because the standard deduction is half as much compared to a couple, but the buy-in and rent expenses are largely the same as compared with a married couple — which can make itemizing more achievable.
- Your buy-in is hefty, making the non-refundable portion still pretty substantial even in a 90% refund scenario. I’ve seen cottages go for $800,000 to $1.2 million.
- Your buy-in is largely non-refundable or amortizes pretty quickly. Again, this makes the portion eligible for a deduction that much larger.
- You have other medical expenses to itemize beyond buy-in and rent, making it easier to overcome the AGI 7.5% threshold and beat out the standard deduction.
- You have other non-medical deductions to itemize which doesn’t help with the 7.5% AGI threshold but still makes itemizing more achievable.
Bear in mind
Considering a CCRC to meet one’s lifestyle and eventual care needs is a big decision — not simply from a financial perspective, but also due to its direct impact on quality of life. It’s very important to understand the amenities, culture and care provided by the CCRC in question, which can be learned or experienced in a variety of ways. Rushing the decision can ultimately lead to switching rooms or communities altogether. So while choosing a community where you can take a tax deduction on rent or buy-in is great, ensure it ticks many more boxes than just the ones that deem it as financially efficient.
Quentara E. Costa, CFP, the owner of POWWOW LLC, an advice-only financial planning firm in North Andover, Mass., specializing in helping the sandwich generation. She is a board member for the North Andover Council on Aging.
