Tax Break Helps Pay for CCRC Fees

Takeaways

• A lesser-known financial upside of Continuing Care Retirement Community (CCRCs) is the potential tax deductibility of a portion of the entrance fee and monthly fees.

Continuing Care Retirement Communities (CCRCs) provide the entire continuum of care under one roof for senior residents, from independent living to assisted living and skilled nursing care. While this model eliminates the stress and disruption of moving multiple times as care needs change, it comes with a significant financial commitment.

A little-known tax break can help defray the costs of CCRCs. That tax break and others can be used for alternative senior living options as well.

What Is a CCRC?

CCRCs, also known as life plan communities, operate on the principle of “aging in place.”

• Residents typically start in independent living units, such as apartments or cottages, enjoying a maintenance-free lifestyle with access to amenities like dining venues, fitness centers, social activities, and transportation services.
• If residents require help with daily tasks like bathing, dressing, or medication management, they can transition to assisted living, where they receive personalized support while maintaining as much independence as possible.
• For those who need 24-hour medical care and supervision, skilled nursing facilities within the CCRC provide comprehensive health care services.
• Specialized units offer a secure and supportive environment for individuals with Alzheimer's disease or other forms of dementia.

CCRCs are one of many senior living arrangements that are growing in popularity as the U.S. population ages, lives longer, and drives demand for senior housing across various levels of assistance.

There are around 2,000 CCRCs in the U.S., most of them concentrated in areas with higher populations of older adults, such as California, Florida, and the Northeast, although the Midwest has a high concentration of CCRCs relative to its senior population.

After a dip during the pandemic, CCRC occupancy rates are rebounding and were at around 85 percent to 90 percent in the third quarter of 2024. Industry analysts break down occupancy rates between facilities that charge one-time entrance fees (entrance-fee CCRCs) and those that operate on a month-to-month basis and don’t require an upfront entrance fee, but may have higher monthly costs (rental CCRCs).

The profile of a CCRC resident skews towards health-conscious, socially engaged, and independent-minded seniors who want to maintain their autonomy for as long as possible but also desire a stable living environment that can meet their future health needs.

CCRC residents also tend to be financially secure “life planners” who have chosen this arrangement carefully and with considerable savings — reflecting the fact that CCRCS are not the cheapest senior housing option.

CCRC Costs

Most CCRCs have two primary costs:

• Entrance Fee: This one-time payment can range from tens of thousands to hundreds of thousands of dollars or more, depending on factors like location, accommodation size, and contract type. The average cost of CCRC entrance fees is approximately $400,000.
• Monthly Fees: Monthly CCRC fees range from $2,000 to $5,000 or more and cover ongoing services, including maintenance, meals, utilities, amenities, and access to health care. The average rent for a CCRC in 2023 was $3,450.
  The structure of these costs, in particular the entrance fee, which may or may not be refundable, is largely dependent on the type of contract.
• Life Care (Type A): Offers unlimited access to health care services with minimal or no increase in monthly fees as care needs escalate. Type A contracts are more predictable but usually have the highest entrance fee.
• Modified Contract (Type B): Includes a preset amount of health care services in the monthly fee. If residents require care beyond this limit, they pay for it on a fee-for-service basis.
• Fee-for-Service (Type C): Fee-for-service contracts have the lowest entrance fee and focus primarily on independent living. Residents pay for health care services as needed.

Some CCRC contracts allow for a full refund of the entrance fee to a resident or their estate, regardless of how long they lived in the community. Others have a tiered, partially refundable entrance fee based on a percentage (e.g., 50 percent, 75 percent, or 90 percent) that may decline over a set period, eventually reaching zero over a certain number of years, or remain fixed.

Tax Benefits of CCRCs

A lesser-known financial upside of CCRCs is the potential tax deductibility of a portion of the entrance fee and monthly fees.

Because CCRCs provide a full range of health care services, when residents enter one of these facilities, they are contracting for future health care. These health care services may be considered qualified medical expenses under IRS rules and eligible for a tax deduction.

If your medical expenses are more than 7.5 percent of your adjusted gross income, you may be able to deduct some health care costs from your taxes.

The exact percentage of CCRC fees that are tax deductible varies considerably from CCRC to CCRC. The amount doesn’t depend on the health care services that an individual resident actually received, but rather the aggregate for the entire community.

The CCRC is responsible for informing residents about the percentage of its fees that are for medical costs. Expenses allocable to medical care include nursing care and medical equipment, in addition to amenities like meals and housekeeping that are deemed medically necessary.

Here are the basics of how the CCRC deduction works:

• If the CCRC’s entrance fee is nonrefundable, the IRS considers a portion of that fee to be prepayment of medical expenses.
• If the entrance fee is refundable, the tax deduction only applies to the portion of the fee that is nonrefundable.
• Part of the monthly fee may also be deductible.
• To claim a deduction, your total medical expenses, including those from the CCRC, must exceed 7.5 percent of your adjusted gross income (AGI). Your AGI is your total gross income minus specific deductions. 
  For example, if your AGI is $100,000, you can only deduct medical expenses exceeding $7,500.
• Each CCRC calculates the percentage of its fees that qualify as medical expenses by analyzing their overall costs related to providing health care services to all residents.
• The CCRC sends residents a Form 1099-MISC, outlining the deductible portion of their expenses.
• You must itemize deductions on Schedule A of Form 1040 to take advantage of the deduction.
• You don’t have to be actively using health care services to claim the deduction. It is available from day one, even if you don’t need health care immediately upon moving in.

The percentage of CCRC fees considered deductible can change from year to year, depending on the CCRC’s costs. Different contract types and fee structures can also impact the amount of the potential deduction.

CCRC Alternatives and Other Senior Living Tax Breaks

Data shows that the percentage of the U.S. population age 65 and older increased 34 percent from 2012 to 2022. By 2040, the 65+ demographic is expected to increase from 17 percent of the population to 22 percent.

The graying U.S. populace is driving demand for senor living facilities that provide varying levels of assistance. Housing experts estimate a need to deliver more than 42,000 new senior housing units annually to meet demand. Higher demand, plus factors like inflation and rising operating expenses, are leading to an overall cost increase for senior housing. Recent reports show increases of 5 percent or more year-over-year.

CCRCs are part of the senior housing mix, but lifestyle and cost factors mean they aren’t right for everyone. In addition to CCRCs, there are housing arrangements available to seniors that may cost less while still providing tax advantages.

• Aging in place with home modifications: If you make home modifications for medical reasons (e.g., installing a ramp due to limited mobility), the costs may qualify as deductible medical expenses, subject to the 7.5 percent AGI threshold. Some federal and state programs, such as the Older Adult Home Modification Program, also give tax credits to seniors or individuals with disabilities who make home modifications to improve accessibility.
• Assisted living facility: A portion of assisted living expenses may be deductible as medical expenses if the resident is considered “chronically ill” by the IRS and requires assistance with activities of daily living (ADLs) like bathing, dressing, and toileting.
• Memory care facility: The resident of a memory care facility who meets IRS chronic illness criteria may qualify for the medical expense deduction. Deductible expenses might cover nursing services, medication management, therapy, and personal care services. Some CCRCs have memory care units, and residents of these units may be able to deduct a portion of their fees.
• Independent living communities: Independent living facilities are usually considered housing, not health care facilities, so their costs are generally not deductible. However, if the community provides some medical services, those specific health care costs might be deductible.
• Dependent Care Credit: Those who pay for assisted living for a parent or other qualifying relative might be eligible for the dependent care credit if they meet certain dependency requirements.

Choosing the right living arrangement is a major decision for seniors that impacts their long-term health, style of living, and finances and requires planning ahead, sometimes years in advance. Rising costs can make it difficult for older Americans, especially those with fixed incomes, to afford senior housing, but tax breaks may help to make CCRCs and other arrangements more affordable.

Contact a local elder law attorney to discuss the different senior housing options available and whether you are eligible to deduct medical expenses associated with senior living from your taxes.