- IRS Discusses Tax Depreciation for Continuing Care Retirement Communities
- December 6, 2011 | Authors: Daniel R. Blickman; Stephen E. Luongo
- Law Firm: Blank Rome LLP - Philadelphia Office
In a Chief Counsel Memorandum released on November 25, 2011, the Internal Revenue Service (the "IRS") Office of Chief Counsel said that a taxpayer operating a continuing care retirement community ("CCRC") can properly treat its facilities as residential real property subject to a 27.5 year recovery period. The memorandum is particularly helpful in its conclusion that certain health service fees earned by the operator of a CCRC are disregarded in determining whether a facility is residential real property.
In CCA 201147025 (the "CCA"), as is typical with CCRCs, the continuing care agreements between the facilities and the residents were not in the form of a sale or lease. Instead, the agreements typically required a resident to pay a substantial monthly fee in exchange for an array of living options including independent living, assisted-living, Alzheimer’s/memory support care and skilled nursing care. Depending on the CCRC option, a resident can either pay a substantial initial payment and move among the different living options without incurring an additional monthly fee, or alternatively, not pay an upfront entrance fee and pay additional charges for any onsite assisted living, personal care or Alzheimer disease care. The CCRC operator reported all its income as service income, not as rental income.
The CCA addressed whether fees earned under the continuing care agreements constituted rental income in determining whether a facility is residential real property for purposes of tax depreciation. The CCA observed that some portion of the fees paid were residential rent, since the right to live in a residential unit was part of the rights paid for under the continuing care agreements. The fact that the agreements were not in the form of a lease did not change this conclusion. Similarly, the fact that the CCRC operator reported all the fee income as service income did not matter, either. Moreover, if an agreement provided for residents to move among facilities, based on their health situation, they were still considered to be paying residential rent.
The Internal Revenue Code of 1986, as amended (the "Code") generally provides a depreciation deduction over a 27.5 year recovery period for "residential real property" and a 39 year recovery period for "nonresidential real property." Residential real property is generally defined as any building if 80% or more of the gross rental income from such building is from "dwelling units" such as houses or apartments providing living accommodations on a non-transient basis. In calculating this 80% ratio, the numerator is the portion of the fees allocable to residential rent. The denominator is the total rent received, both residential rents and non-residential rents, if any. In the case of the continuing care agreements, the portion of the fees not paid for residential rent were generally paid for health services, and these health service fees were not included in either the numerator or denominator. Thus, only if a senior housing facility rented out space to commercial operations, such that those non-residential rents were over 20% of its total rents, would it be likely to fail this test.
The Office of Chief Counsel’s opinion should be viewed as helpful for senior housing operators, as many will qualify for the faster depreciation period under its analysis. This opinion from the Office of the IRS Chief Counsel is not a formal IRS published ruling, so that operators should not regard it as IRS guidance on which they are legally entitled to rely.
Businesses with questions about the depreciation deduction, or with questions about the recovery period of certain business property, should consult experienced tax counsel. Blank Rome LLP has significant experience providing tax and other advice to senior housing operators and can assist businesses with any tax questions it may have with respect to the acquisition and operation of such facilities.