The IRS allows sellers of co-ops to deduct medical expenses if they meet certain requirements. In this article, tax guru Julian Block explains how co-op owners can deduct for operating and maintenance expenses related to medical equipment even if they don't meet other requirements.
If you’re just joining us, the previous four parts in this series summarized how ownership of conventional single-family dwellings differs from ownership of condos or co-op apartments and explained when the IRS will allow owners of co-op apartments to build up the adjusted basis for their apartment or require them to decrease it.
Medical deductions for doctor-recommended improvements. Your client who owns a co-op might be wondering whether they need to decrease their adjusted basis to reflect payments for medical expenses. It depends on whether they were able to satisfy restrictions imposed by Code Section 213 on deductions for medical care.
First, those expenditures are deductible only if they forego the standard deductions amounts that are available to nonitemizers and itemize on Schedule A of the 1040 form. Another requirement for any write-off is that their payments are for bills that aren’t covered by insurance, reimbursed by their employers or otherwise satisfied.
The big hurdle is that the expenses must be sizable. Payments are deductible only to the extent that their total in any one year exceeds 7.5 percent of adjusted gross income. Consequently, an AGI of $200,000 means no deduction for the first $15,000 of medical expenses.
If a co-op owner manages to exceed the 7.5 percent floor, their deductible expenditures can cover more than the obvious outlays for doctors, hospitals, eyeglasses, hearing aids, insurance coverage and the like. They also include payments for medically mandated home improvements or the installation of special equipment or facilities in their apartment.
There’s no deduction, however, for the entire cost of equipment or improvements that increase their dwelling’s value. Generally, the cap on the deduction is the amount by which the cost of the equipment exceeds the increase in their apartment’s value.
For example, if an allergist recommends installing an air-cleaning system for a family member with asthma costing a total of $20,000 and their apartment’s value increases by $15,000, the allowable deduction shrinks to just $5,000. Other improvements or equipment that readily pass IRS muster are an elevator or a bathroom on a lower floor that make living easier for a person with arthritis or a heart condition, for example.
More liberal rules apply when the doctor-recommended improvements, such as a wheelchair ramp, are made to a rental property by a tenant. A renter can claim the entire cost because the improvement adds nothing to the value of their property. Whether you own or rent, your deductibles include the entire cost of detachable equipment––for example, a window air conditioner that relieves a medical problem.
Even when co-op owners can’t deduct equipment because it costs less than their apartment’s increase in value, they can deduct for operating and maintenance expenses, such as electricity, repairs or service contracts as long as the equipment remains medically required.
What’s next. Part six will further discuss medical deductions and focus on how the rules work when co-op owners want to accommodate their apartment for people with physical disabilities.
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...