Updated June 18, 2020
There are many ways to invest in residential assisted living facilities (ALF). Certain investment strategies can help minimize your risk and tax liability in this growing industry.
5 Ways to Protect Residential Assisted Living Real Estate Investment
- Consider Investment Types
- Look into Insurance
- Find Out Federal, State, and Local Regulations
- Plan for Assisted Living Facility Taxes
- Consult with a Tax and Legal Advisor
Several factors are contributing to high projected growth potential in senior care investing opportunities. First, healthcare advances are extending the ability of the elderly to enjoy independent daily living. Next, the large Baby Boomer generation is reaching retirement age and approaching the average age of those who benefit most from senior residential care facilities like ALFs. Currently, there are many benefits to investing in real estate on top of these factors.
These include legal protections and tax benefits. You may also be looking for a suitable place for loved ones or to create a place for them that also generates a return or helps offset costs of elderly care in an assisted living community.
Consider Investment Types
There are many options for those looking to invest in residential assisted living. While it may be beneficial to diversify and spread risk across different investment vehicles, it is also important to choose sound investments. To this end, one could choose to minimize risks by investing in healthcare real estate management companies or healthcare real estate investment trusts (REITs). These organizations may own or invest in a range of assisted living and nursing homes and carry most of the risk for you.
A more involved approach with greater possible rewards might be to buy or convert property useable as an assisted living facility. This method is more complex and requires certain regulations to be met. Investors may also be interested in using a land trust to buy real estate for a business.
Besides choosing to run the business, an assisted living facility property manager could be hired to operate the home. The house could instead be leased to an elderly healthcare company. To protect your investment, you must vet the company you are looking to hire or lease. Their experience and track record are important points to consider in addition to their residential assisted living business plan.
In some cases, entire communities have worked together to form residential care communities and similar groups. Businesses in these communities might benefit from strategic alliances and sharing of resources to provide more efficient and thorough personal care. Each of these investment options carries its own risk and reward and it may be best to seek out expert legal aid to find the best one for you.
Depending on the investment choice, a real estate investor should also consider liability issues and anonymity for personal protection. The way the investment is organized can have a substantial impact on available options. For example, one might have a property placed in a land or personal property trust and have a limited liability company (LLC) named as the beneficiary. The investor’s identity may be protected and lawyers would be dissuaded from going after their personal assets. There are cases where tenants track down the property owners instead of the property manager, and the last thing you want is a disgruntled tenant approaching your personal residence. For more information on using trusts and LLCs to manage investments, you can read about real estate asset management in greater detail. Laws may vary by state regarding what protections a trust has and the limits of liability available. The additional layer of healthcare services offered for older adults also carries legal implications. Contact us today for more information and to find out what options are best for you.
Look into Insurance
There are multiple insurances to consider for each investment type. First and foremost is personal and commercial property insurance to protect assets against damage. This would also help in the case where a tenant lacks insurance or other damages are caused to your property. It is also advisable to obtain general and professional liability insurance to cover a wide range of possible eventualities with running a business. For example, if a resident, staff member, or guest sues for damages. Professional liability is essential for those working in healthcare such as residential assisted living homes. A worst-case scenario might include a medical malpractice complaint against a tenant or staff member of a company you own.
Depending on the business structure and how you invested, landlord insurance might be advisable. Also, if a company vehicle is used to help transport elderly residents it is important to have auto insurance or commercial vehicle insurance. Finally, if there are any staff members that work for your company you may also need to get workers compensation insurance for employees. Healthcare can lead to unique patient care needs and increased liability issues. It’s a good idea to obtain expert counsel for your particular situation to ensure you and your assets are fully covered.
The long-term care insurance of the tenants will also play a role in the type of care and assisted living services offered. Adult residential care facilities generally offer less care than nursing homes to suit those that prefer more independent living. However, the standards of care and the long-term care services that a business offers may vary greatly from facility to facility. Board and care including daily meals, transportation services, and periodic nursing staff visits are some basic offerings of assisted living facilities. Medicare and Medicaid are large payers in this field but usually have more strict requirements for caregivers and adult care homes.
Find Out Federal, State, and Local Regulations
There are many different care options available to seniors depending on their health and independence. Some special care, such as severe Alzheimer’s disease or dementia care, require around-the-clock access to nursing staff. Others might only need assistance for certain daily activities which warrant a few hours of quality care and nursing. Depending on the level of care and whether the facility accepts Medicare and Medicaid, the business could be subject to Federal regulations. State regulations vary along with local laws. It is important to review the laws and regulations of your state, city, and local area. Additionally, assisted care facilities may require certain business permits and licenses to operate on your property.
Most elderly residents are protected, like any renter, but they typically pay higher monthly and yearly costs for assisted living options. Regulations for care and senior tenant rights might also include provisions related to health changes requiring increases or decreases in care needs. For example, a change in health for a tenant requiring constant nursing care might allow the tenant to break a lease early. The types of services and frequency offered by the senior care facility will impact the type and number of applicable laws and regulations. If you are hiring a property management company or leasing your property you might check to ensure they have their proper licenses and permits to operate legally. Failing due diligence and not having any legal protection for your real estate investment, such as a trust with limited liability, could see you losing much more than the investment. Ensure you are properly protected.
There has been an increase in both the number and severity of cyber attacks on businesses that handle personal information, including those involved in medicine and health. Healthcare organizations hold payment information along with plenty of other information valuable to thieves. Private health information is covered by the Health Insurance Portability and Accountability Act (HIPAA) which may lead to fines for those assisted living facilities that do not take reasonable precautions to protect the private information of tenants. The protections required will vary by facility type as well as state and local laws. The processing of healthcare claims is also subject to heavy regulation, and an ALF may benefit from efficient tenant healthcare management systems.
Plan for Assisted Living Facility Taxes
Protecting any investment requires utilizing the best methods to reap the most earnings possible. Part of this involves effective management of investments and capital gains taxes. The recent Tax Cuts and Jobs Act as part of Trump’s tax reform plan has provisions which primarily benefit real estate investing for the next few years. The act allows for a 20% deduction on qualified business income from pass-through business entities such as limited liability companies (LLCs), S corps, and real estate investment trusts (REITs). Because the tax reform also allows for some assets like real estate property to be considered in calculating the deduction, many real estate investors can utilize this tax break. However, there are limitations regarding healthcare businesses and those with certain income levels. To see if you qualify for this deduction with your investments it would be best to consult with a tax advisor.
Other components of the Tax Cuts and Jobs Act reduce available deductions for mortgage interest but keep the deduction for those with second homes. Again, this benefits real estate investors who may want to invest in an ALF. Another provision of the reform makes home equity loan deductions apply only to qualified home improvements. The necessary improvements to convert a home into an assisted senior living facility may be qualified for this deduction, offering possible tax advantages.
Some aspects of the tax reform are set to expire over the next couple of years, so reach out today to find out what options are the best for your unique situation. Real estate investors may benefit from using trusts and other estate planning tools to shield investments from taxes. There are methods to decrease the taxes on real estate gains, especially when they are placed in a trust for future generations. The tax cut doubles the transfer tax exemption for a limited time. You may decide now is the ideal time to transfer property as an inheritance.
Finally, there is the possibility of like-kind real estate asset exchanges also know by Section 1031 exchange. This may allow a tax deferment on capital gains used to purchase another qualifying real estate asset. These methods are more complex and must be carefully managed to avoid tax issues.
Consult with a Tax and Legal Advisor
There are many tax and legal issues to consider when investing in or starting a residential assisted living facility. Investors that earn certain amounts of self-employment, LLC, or REIT and investment income (not subject to withholding) may be required to pay estimated taxes quarterly or face underpayment penalties.
Because protecting your real estate assets and investments can involve many different aspects ranging from state and local laws to federal healthcare regulations, tax strategies, and business entity organizational concerns, it is always a good idea to consult with a tax advisor.
Residential Assisted Living Facilities
There are over 30,000 assisted living communities in the U.S., of which 48% are smaller facilities with only four to ten beds. Just under half of those were operated by independent businesses. These facilities offer less than a traditional nursing home and provide more independence to elderly tenants. They typically require minimal staff to prepare daily meals and provide limited nursing time to each tenant. Some offer transportation services as well.
This industry is expected to grow for many reasons and has attracted the attention of investors. There are many ways to invest in residential adult and elderly care facilities. The type of investment and the method of structuring the investment can greatly impact the returns you see. Limiting liability and preserving anonymity are two methods of reducing the impact of possible issues with ALFs.
Due to the range of business needs and possible liability issues, real estate investors may want to consider a variety of insurances to protect their investments. These include personal and commercial insurance, general and professional insurance, vehicle and landlord insurance and workers compensation. Investors should also learn or consider the impact of federal, state, and local laws and regulations regarding residential assisted living facilities and their operation. This includes permits, licenses, and policies regarding tenants and early moving. Since these facilities utilize private health information, they may be subject to HIPAA rules and require protection of patient information.
Investors can limit the tax liabilities of running an elderly care center by implementing a variety of legal strategies. There are also many tax breaks available from the recent tax reform, but some are set to expire in a few years. To ensure you meet required laws and regulations, to protect your assets and investments, and to make the most of your tax liability, reach out to Anderson Advisors today.
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