Life Plan Communities (formerly known as continuing care retirement communities or CCRCs) often require an entrance fee in exchange for lifetime housing and priority access to healthcare. In many cases, a sizable portion of the entrance fee may be refundable to the resident if they move out, or to the resident’s estate at death.

A question that some prospective residents may have is whether a refundable entrance fee might be taxed when received. To help answer this question, it is necessary to first describe refundable entrance fees in a little more detail.

Contract Types and Entrance Fee Plans

First, it’s important to understand that Life Plan Communities offer different contract types…A (Life Care), C (Fee-for-Service), or B (a hybrid of A & C). Second, it’s equally important to know the definition of an entrance fee: a one-time, up-front investment, similar to purchasing your own home, but you do not hold deed to the home. 

At Moravian Manor Communities, we offer a Type C (Fee-For-Service) contract and three options in which to pay your entrance fee. 

  1. Traditional Plan: Declines at 2% per month for 50 months. No refund after 50 months.
  2. 25% Refundable Plan: Declines at 1.5% per month for 50 months.  After 50 months, a guaranteed refund of 25% of the original entrance fee remains.  
  3. 50% Refundable Plan: Declines at 1% per month for 50 months. After 50 months, a guaranteed refund of 50% of the original entrance fee remains. 

The types of entrance fee plans offered will vary from community to community. Be sure to include that on your list of questions when meeting with a community’s residency counselor. 

Generally speaking, the refundable portion of the entrance fee is not taxed as income when received by the resident or their heirs. But there are some exceptions.

Impact of Medical Expense Deductions

First, if a resident takes a medical expense tax deduction on the entrance fee it could cause some part of the refund to be taxed when received. Such a deduction may be available because some Life Plan Communities with a Type A (Life Care) contract use a portion of the entrance fee to help offset the cost of future healthcare services. A representative of the community should be able to provide you with an estimate of the percentage of its overall operating expenses that are spent providing healthcare, and it is this amount that may be deductible as a medical expense. Allowable medical expense tax deduction could range anywhere between 20-40% of the non-refundable portion of the entrance fee. However, if a deduction is taken on any amount of the entrance fee that will ultimately be refunded, then that amount would likely be taxed when received.

A similar situation, as it pertains to a Life Care/Type A Contract, could even apply when someone chooses a traditional, declining balance plan. As an example, suppose a resident takes a medical expense tax deduction on the entire entrance fee, but ends up unexpectedly moving out or passing away sometime during the first couple of years. In this case, a refund would be received in accordance with the amortization schedule and a sizable portion of the refund could be taxed.

In summary, if a resident (or a resident’s heirs) receives any portion of a refundable entrance fee that had previously been deducted, then it would most likely trigger an income tax when received. 

Estate Taxes

The other area where a refundable entrance fee could potentially be taxable would be in regards to a federal estate tax. A refundable entrance fee is most likely going to be considered an asset of the resident(s) and, as such, could be included as part of a decedent’s estate and subject to any applicable federal estate taxes. Of course, if the total value of the estate, including the refundable entrance fee, does not exceed the gift and estate tax exemption, then this would be a non-issue. Potential estate or inheritance taxes at the state level could vary from state to state.

Disclaimer: The information presented in this post should not be construed as legal or tax advice. Be sure to consult with your legal and tax advisors before making any decisions regarding refundable entrance fees and to better understand the possible federal and state tax implications.