Are There Any Tax Benefits to Loss of CCRC Deposit?
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Question:
In this article “Can Heirs Take a Capital Loss on Return of 90% of CCRC Deposit?” you talk about the 10% not being a capital loss. But, what if the CCRC has no funding and you get nothing back from the 90%. Is there any kind of tax loss or medical expense that can be claimed on that amount? In my Dad’s case it was about $222,000 buy-in. My Dad has passed away. The community has no money. What now?
Response:
You may be a bit better off in your situation, at least in tax terms. The continuing care retirement community’s (CCRC) failure to honor its commitment under its contract may be treated as a bad debt. You may deduct a bad debt as a short-term capital loss. Here’s an explanation on the IRS website: https://www.irs.gov/taxtopics/tc453. But the tax benefit may work better in theory than in practice.
The first problem is that there are limitations on how you can use a short-term capital loss. You can deduct $3,000 from ordinary income. The rest would have to be deducted against short-term capital gain, which is only on losses incurred on investments held for less than a year.
The second problem is making the loss pass through to you and your siblings, if any. To do this, you will need to file a 1041 tax return for your father’s estate and then issue K-1s to you and any other heirs so that any income and losses pass through to the heirs. Then you can each report your pro rata share of the income and losses on your returns.
You will have to assess whether the tax benefits are worth the effort and cost. I would recommend working with an accountant on this.
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