The Entrance Fee Is a Tax Decision: Paying for a Continuing Care Community in Chester County

Henry Supinski, ChFC® · 8 min read · September 2026

Couples touring a continuing care retirement community usually arrive with the right question in the wrong order. They ask whether they can afford it. The harder question is which account the money should come from, in which calendar year, and under which contract option, because those three choices can change the after-tax cost of the same apartment by a large amount. Most of the tax planning has to happen before the check is written, and the tour does not cover it.

What You Are Actually Buying

A continuing care community charges a one-time entrance fee plus a monthly fee. The entrance fee is not rent and it is not a purchase of real estate. It buys a contractual promise that the community will provide care as your needs change, including personal care and skilled nursing, without repricing you into the open market later. That promise is what makes the tax treatment unusual.

Locally the range is wide. Kendal~Crosslands Communities, the four Quaker-founded communities in Kennett Square, publishes sample fees that start around $99,000 for a studio and run past $360,000 for a two bedroom, with monthly fees in the several thousands and higher figures for double occupancy. Residences there are designed for people age 65 and older, which matters for couples with a younger spouse. If one of you is not yet 65, ask early how the community handles that, because it can decide whether you are shopping this year or in three years.

You will also be asked to pick a refund option. Kendal~Crosslands offers plans that refund 90 percent, 50 percent, or none of the entrance fee when you leave or die. That looks like an estate question. It is also a tax question, and the two answers can point in opposite directions.

Part of the Fee Is a Medical Expense

When you sign a continuing care contract, some portion of what you pay is a prepayment for future health care. The IRS has long allowed residents to treat that portion as a medical expense in the year it is paid, even though no care has been delivered yet. The community calculates the share by comparing its health care costs to the fees it collects, and it tells residents the result. At Kendal~Crosslands the finance office issues that letter each January, covering both the entrance fee in the year you move in and the monthly fees every year after.

Two limits keep this from being free money. It is an itemized deduction, so it only counts to the extent your total medical expenses exceed 7.5 percent of your adjusted gross income, and you have to itemize rather than take the standard deduction. In the year of a large entrance fee, both of those usually take care of themselves. In an ordinary year, the monthly fee portion alone often does not clear the floor.

The Refund Option Changes the Deduction

Here is the part that rarely comes up on a tour. A refundable entrance fee is money you expect to get back, and many tax advisers treat the refundable portion as a deposit rather than a prepayment for care. Under that reading, a 90 percent refundable plan can produce a far smaller current deduction than a plan with no refund, because most of what you paid is not really spent.

So the refund choice sets two dials at once. A large refund guarantee protects the estate and shrinks the deduction. No refund gives up the estate money and can make a much bigger share of the fee deductible in the year you need the deduction most. Treatment varies by contract and advisers do not all read it the same way, so the practical step is to ask the community, in writing, what deductible amount it would report under each refund option, and then hand that to your accountant before you sign.

Which way you should lean depends on what else is in the estate. A couple whose children will inherit appreciated real estate is already leaving something behind and may not need the refund guarantee. A couple whose entrance fee is most of their remaining net worth usually will.

Where the Money Comes From, and When

Most couples fund the entrance fee from a pre-tax IRA, from taxable investments, from the sale of a house, or from some combination. The account matters, but the calendar matters more.

A withdrawal from a pre-tax IRA is ordinary income. A large entrance fee generates a large medical deduction. Put both in the same tax year and the deduction absorbs a meaningful part of the income. Split them across two calendar years, which happens easily when someone signs in November and moves in February, and you have taken the income in one year and the deduction in another, where much of it may go unused. Nothing about the move changed. The tax bill did.

The same logic opens a second door. If the deduction is larger than the income you needed to pull, the entry year can be an unusually cheap year to do a Roth conversion, moving money out of the pre-tax system at a rate you will not see again. That is worth modeling before the entry year rather than discovering it afterward.

The Medicare Bill Arrives Two Years Later

A large withdrawal raises your income, and Medicare sets Part B and Part D premiums using income from two years earlier. So the entry year quietly sets a surcharge that shows up on a premium notice long after the move is finished. This is IRMAA, and for a high one-year income spike it can add up to real money for both spouses.

Be careful about assuming it can be appealed. The SSA-44 appeal exists for life-changing events such as retirement, the death of a spouse, or the loss of income-producing property. A voluntary IRA withdrawal is not on that list. The surcharge from a funding decision generally has to be planned around, not undone.

Couples with an age gap should look at one specific year. If the younger spouse is 63, that is the income year behind their first Medicare premium at 65. A withdrawal taken then lands directly on the first bill they ever receive. Shifting it by a year sometimes costs nothing and saves the surcharge outright.

If You Own Rental Property

Rental real estate is the asset most likely to get sold for the wrong reason. It is illiquid, it feels like a burden at 70, and an entrance fee is a convenient excuse to be done with it. The tax math often disagrees.

Selling appreciated rental property triggers capital gain plus depreciation recapture, taxed at up to 25 percent on the depreciation you claimed over the years, and possibly the 3.8 percent net investment income tax on top. Hold the same property until death and it generally receives a step-up in basis that erases the gain and the recapture together. In Pennsylvania, heirs then owe inheritance tax on what they receive, currently 4.5 percent for children and nothing for a surviving spouse, which is a real cost but a much smaller one than a lifetime sale can produce. Our Pennsylvania inheritance tax piece walks through who pays what.

There is an offsetting factor worth checking. If the properties have accumulated suspended passive losses, a complete sale releases them, and those losses can shelter other income in the year of the sale, including an IRA withdrawal. Whether that outweighs the recapture is an arithmetic question with a real answer, and it is different for every property.

One note on whose advice you are getting. An adviser paid a percentage of the portfolio has a built-in reason to prefer that rental property be sold and the proceeds invested with them. That does not make the recommendation wrong, but it is worth knowing the incentive behind it before you act on it.

A Hypothetical Couple

The details are invented; the rules are real. He is 67, she is 63, both retired, with two rental duplexes and most of their savings in his rollover IRA. They choose a two bedroom cottage and a contract with no refund, after asking the community what the deductible amount would be under each option and finding that the no-refund plan reported a far larger figure. They take the IRA withdrawal in the same calendar year they pay the fee, so the medical deduction lands against the income. They keep both duplexes, because the rents cover a large share of the monthly fee and their children will inherit the properties with a stepped-up basis. Because her age 63 income year now shows a spike, they move a planned second withdrawal into the following January so her first Medicare premium at 65 is not set by it. Same cottage, same community, materially different cost.

Change one fact and the answer changes. If their children needed cash rather than real estate, the refund plan and a property sale might both make sense. This is a coordination problem, not a formula.

Where This Fits

A continuing care community is usually the largest single check a couple writes in retirement, and it touches income planning, Medicare, the estate, and the tax return in the same twelve months. The contract question belongs to the community and your attorney. The funding question is a planning question, and it has to be answered before the deposit, not at tax time. We work through it as one calendar for families in southern Chester County, including people looking at communities near Kennett Square and considering how the move fits the rest of their retirement income plan. If a move is also a downsizing, our piece on downsizing in retirement covers the household side.

Nothing here is tax advice for your situation. Fee amounts, refund options, and the deductible share differ by community and by contract, and the deductible amount comes from the community's own annual letter. Confirm the numbers with the community and your accountant before you act.

Questions We Hear

Is a CCRC entrance fee tax deductible?

Part of it usually is. Under a continuing care contract, the share of the entrance fee that prepays future health care is treated as a medical expense in the year you pay it. The community calculates that share and sends residents a letter each year stating the amount or percentage. It is an itemized deduction, so it only helps to the extent your total medical expenses exceed 7.5 percent of your adjusted gross income.

Does the refund option change the deduction?

It can, significantly. A refundable entrance fee is money you expect to get back, and many tax advisers treat the refundable portion as a deposit rather than a prepayment for care. A plan with a large refund guarantee may therefore produce a much smaller current deduction than a plan with no refund. Ask the community how it calculates the deductible amount under each refund option before you choose one.

Can I use IRA money to pay a CCRC entrance fee?

Yes, and the timing matters more than the source. A withdrawal from a pre-tax IRA is ordinary income. If the withdrawal and the entrance fee land in the same tax year, the medical expense deduction from the fee can offset a meaningful part of that income. Split them across two calendar years and you take the income in one year and the deduction in another, where it may be largely wasted.

Will a large withdrawal raise my Medicare premiums?

Probably, two years later. Medicare uses your income from two years earlier to set Part B and Part D premiums. A one-time IRA withdrawal is not one of the life-changing events that qualifies for an SSA-44 appeal, so the surcharge generally has to be planned around rather than appealed. For a couple, watch the younger spouse's age 63 year, because that is the income year behind their first Medicare premium.

Should I sell rental property to pay the entrance fee?

Not automatically. Selling appreciated rental property triggers capital gain plus depreciation recapture taxed at up to 25 percent, and possibly the 3.8 percent net investment income tax. Property held until death generally receives a step-up in basis that erases both. Which asset you spend first is a planning decision, and rental real estate is often the wrong one to sell.