Continuing care retirement communities (CCRCs), also called life plan communities, frequently require an entry fee that secures lifetime housing and priority access to healthcare services. Often a significant portion of that entry fee is refundable to the resident if they move out, or to the resident’s heirs after death.
Prospective residents commonly ask whether a refundable entry fee will be taxed when it is received. To answer that clearly, it helps to explain how refundable entry fees typically work.
CCRC Entry Fee Refund Options
Entry-fee retirement communities generally offer two common contract structures:
- Traditional declining-balance contract
- Refundable contract
With a declining-balance contract, the refundable amount decreases over a set period after move-in, often two to four years. For example, an entry fee might amortize at 25% per year for four years; after that period no refund remains. A refundable contract can also amortize initially but reserves some portion as permanently refundable. For instance, a 50% refundable contract could amortize 25% per year for two years while the remaining 50% remains refundable regardless of how long the resident lives in the community.
Generally, the refundable portion of an entry fee is not treated as taxable income when it is returned to the resident or their heirs. However, there are important exceptions to be aware of.
Impact of Medical Expense Deductions
One key exception involves medical expense tax deductions. Some CCRCs allocate part of the entry fee toward future healthcare costs. If a resident claims a medical expense deduction for any portion of the entry fee, that previously deducted amount may become taxable when refunded. The community should provide an estimate of what percentage of its operating expenses is devoted to healthcare; that percentage is the portion that might qualify as a deductible medical expense.
Typical allowable medical expense deductions for the nonrefundable portion of an entry fee can vary, commonly ranging from roughly 20% to 40% of that nonrefundable portion. If any portion of the entry fee that was deducted is later refunded, that refunded amount would likely be taxed as income when received.
This issue can also arise with declining-balance contracts. For example, if a resident deducts the full entry fee as a medical expense but then moves out or dies within the amortization period and a refund is issued, the refunded portion attributable to the deduction could be taxable.
In short, if a resident or the resident’s heirs receive a refund that corresponds to an amount previously claimed as a deduction, that refunded amount will most likely trigger income tax when received.
Estate Taxes
A refundable entry fee can also affect federal estate tax calculations. Because the refundable portion is generally considered an asset of the resident, it may be included in the decedent’s estate and subject to estate tax rules. Whether any tax is owed depends on the total value of the estate and the applicable estate tax exemption.
For estates below the federal exclusion threshold in effect at the relevant time, inclusion of the refundable entry fee typically will not result in federal estate tax. State-level estate or inheritance taxes, however, vary by state and can produce different outcomes.
Disclaimer: This article provides general information and does not constitute legal or tax advice. Consult your legal and tax advisors to understand the specific federal and state tax implications of refundable entry fees before making decisions.