Congress Repeals Imputed Interest Tax for CCRC Residents

On Dec. 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006, H.R. 6111 which permanently ends the imputed interest tax for residents of continuing care retirement communities (CCRCs). The law prevents CCRC residents from being taxed on the interest income imputed to them on the basis of their entrance fees.

Generally, certain loans that bear interest at below-market rates are treated as loans bearing interest at the market rate imputed to the lender. Entrance fees to CCRCs are treated as loans to the retirement facility. Since the CCRC does not pay interest on these loans, the foregone interest is considered imputed interest pursuant to Internal Revenue Code Section 7872. Prior to the new law, the IRS treated the foregone interest (calculated at market rates) as income taxable to the CCRC resident, the lender of the loan.

Section 7872 (h)(1) of the Internal Revenue Code now provides an exemption up to the full aggregate loan amount and the exempt class includes any lenders (CCRC residents) or their spouses who attain age 62 before the close of the year. Previously, section 7872 (h) had a sunset provision ending its applicability in 2011; now, the Tax Relief and Health Care Act of 2006 amends section 7872 (h) by deleting section 7872 (h)(4) which contained the sunset language. As a result, imputed interest taxation is effectively repealed for tax years after Dec. 31, 2005.

For the text of the legislation, click here. See Sec. 425.