Academic journal article Journal of Accountancy

Giving Below-Market Loans to Retirement Facilities

Academic journal article Journal of Accountancy

Giving Below-Market Loans to Retirement Facilities

Article excerpt

A member of a club can't make an interest-free refundable deposit with the club in exchange for full or partial membership rights and avoid being taxed on the forgone interest. Internal Revenue Code section 7872 requires the club member to include it in income.

In contrast, imputed interest income on a high refundable entrance fee to a continuing care facility in exchange for lower monthly payments is not taxable.

Assume the following facts: A retirement apartment community offers its residents the right to occupy an apartment, receive a number of meals a month, obtain group transportation and receive up to 30 days of nursing-home care. Residents can choose one of three payment plans: The first has a high entrance fee (90% to 100% refundable when a resident moves out) and low monthly fees. The other two have lower entrance fees and higher monthly fees.

In technical advice memorandum 9521001 the Internal Revenue Service was asked if residents who pay the refundable entrance fee would be taxed on imputed interest under section 7872. The service ruled that the entrance fee was a loan under section 7872 but said the fee could not be treated as a significant-effect loan under 7872 (c)(1)(E). …

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