Many of my elder care plans are related to choosing the right retirement community. And some of those communities are continuing care retirement communities, also known as CCRCs. A CCRC differs from traditional retirement communities a handful of ways.

  • They tend to be on a larger campus-like setting.
  • Residents generally enjoy more club and trip offerings, as well as amenities (like a pool).
  • They target independent seniors who don’t immediately need elder-care services.
  • Once care is needed, they not only have assisted living and memory care, but often offer rehab and skilled care services on campus 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 you’re “buying-in” you usually have the opportunity to customize your apartment by choosing preferred flooring, paint color, countertop, window treatments, and more prior to move-in (this somewhat depends on your willingness to pay extra and the condition of existing materials).

*Many people refer to the upfront fee as a buy-in, but it’s also described as an entry fee or deposit. You’re really leasing the unit, not buying it, which is why I’m quoting the phrase. Generally, if any refund is due it’s based on what was paid in, not it’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 you may be able to save a bit on taxes if considering this style of community.  You 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.  And this is the first determination for tax-deductibility. The second determination is related to your own financial circumstances.

How CCRCs deliver and charge for care

Some communities focus on accommodating independent seniors, so when the time comes for care, you simply use one of their contracted home-care agencies and pay an hourly rate to “age-in-place” within your 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, because some portion of the buy-in fee must be accounted for by the community as a pre-paid health-care expense. In this case the buy-in fee would be tied to the cost of living there only. You’re 100% responsible for eventual care needs and have not pre-paid anything. The same would be true for any ongoing rent paid. The silver lining is I find that these style communities have the lowest buy-in and rent compared to communities with on-site care offerings. 

In another example, you may pay a buy-in and ongoing rent (let’s say $3,000/month), but when the time comes for care you move out of the independent unit to an on-site assisted living, memory, rehab, or skilled care unit. At that time your rent increases to market-rate (let’s say $10,000/month), meaning that you’re paying about the same as you would had you moved directly into a non-CCRC assisted living community. Again, you have not pre-paid for any care as you’re paying the full cost at the time of service. There is nothing to deduct here at the time of entry or from annual rent.

In my last example, you pay a buy-in and monthly rent and both may seem higher than alternatives you’ve considered. Let’s say $5,000/month for rent. You may also notice the term “LifeCare” on their site and paperwork. It’s explained that when you move to their skilled care (nursing home) your rent remains the same. And if you 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 you’ve pre-paid for eventual elder care. The “LifeCare” style communities are often considered an alternative to long-term care insurance with the higher buy-in and rent akin to to premiums and the pay-out 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 issue a 90% refund of the buy-in when you move out or pass on. There will be paperwork filled out so they know where to direct it (estate/kids/spouse). Other communities may have a different percentage, offer no refund at all, or amortize the refund over time (ie – 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 of 90%, means only 10% can be considered for the deduction which will again be multiplied by a % 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 taxable 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 Own Financial Situation

Pre-paying our 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. For individuals the standard deduction in 2023 is $13,850, heads of households $20,800, and married filing jointly $27,700. Those 65+ can claim an additional deduction anywhere between $1,500 – $3,700, the amount depends on if you’re blind and filing as single, head of household, or married. 

Another thing to keep in mind is that you can only itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI). 

Let’s use an example:

Facts: A single person buys into a CCRC January 1 costing $450,000 upfront. Rent is $5,000/mo. The buy-in is 90% refundable making only 10% eligible toward the deduction calculation. Her AGI is $150,000 and they have been taking a standard deduction. The CCRC has said that 30% of the buy-in and rent are deductible as a medical expense.

$45,000 is the 10% eligible to deduct from buy-in. $60,000 was paid in total rent. Add together and multiple by 30% which the CCRC deems medical pre-payment = $31,500. 

Now we subtract $11,250, which is the 7.5% medical threshold on $150k AGI. This leaves our resident with $20,250 to use as a deduction. 

A single person takes 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 were head of household or married, the standard deduction wins 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 securities, pensions, etc, making the 7.5% threshold also that much higher. Lastly, this is an example of year 1. In year 2 you only have the rent to deduct which makes itemizing very unlikely. 

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 does this work out best? 

  • You’re looking at a LifeCare community where rent expense remains relatively stable, even after care services are provided.
  • If you’re single 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 to 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 $800k – $1.20M. 
  • Your buy-in is largely non-refundable or amortizes pretty quickly. Again, this makes what’s 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.