As a South Florida Medicaid Lawyer, I am often asked about special needs trusts and personal services contracts as asset protection tools for people with over $2,000 in countable assets (for purposes of qualifying for Florida Medicaid ICP or home and community based managed Medicaid). These strategies are tried and true, but I always try discuss some lesser known Medicaid planning methods. This article will focus specifically on using countable assets to purchase rental real estate or income producing property.
Income Producing Property is a Non-Countable Asset for Florida Medicaid
Pursuant to Medicaid rules, any real estate owned by the applicant that is being rented to a separate entity (including family or friends so long as rents are at a rate within community standards) is not counted as an available asset to the applicant. Therefore, if the applicant purchases a home, or second home, and rents it to another individual, the assets used to purchase the home would no longer be counted against the applicant as those assets are invested in a form that is deemed "not available” or “non-countable.”
Specifically, Section 1640.0544 of the ESS Policy Manual (also commonly referred to as the Florida Medicaid Manual) says that the fair market value of any income producing property can be excluded by Medicaid as a countable resource (i.e. deemed exempt), even if used only on a seasonable basis (such as vacation homes).
Florida Medicaid Wont Let You Charge Unreasonably Cheap Rent
This strategy will NOT allow the Medicaid applicant to purchase a second home and rent it out to their child for some unreasonable low number, such as $10.00 per month. Again, the law requires the rent to be within community standards for similar homes (i.e. fair market value rents only).
What about the Medicaid Income Test?
While the rental-producing property Medicaid strategy solves an asset problem (i.e. lets you convert countable resources into non-countable resources), it creates additional income. As you may know, Medicaid has an income limit. Medicaid will add up the income from all sources (social security, pension, 401k, etc...) including your newly found rental income. If the income exceeds the threshold (also called the income test), a QIT (qualified income trust / miller trust) may be necessary. In addition, a portion of the newly found income may be added to the Medicaid recipient's "patient responsibility" calculation. However, thankfully:
Florida Medicaid Lets you Deduct Certain Ordinary and Allowable Expenses from the Rental Income Calculation
Section 1840.0504 explains that ordinary and necessary expenses that can be deducted from rental income include:
- Real estate taxes
- Interest on debts (but you cannot deduct mortgage principal)
- Repairs (i.e. minor corrections to existing structure)
- Cost of advertising for renters
- Lawn service
- Interest and escrow; and
- Homeowner’s Insurance
Property Management Fee as another Necessary and Ordinary Expense from Medicaid Income Calculation
Interestingly, Medicaid rules also allow an amount of up to 10% of the rental income to be deducted for “management expenses.” “Management” can be anyone, including a family member, who the applicant assigns by contractual agreement to manage the property.
Using income producing property or purchasing rental property is a great way to shelter significant assets, produce extra income (which benefits the Medicaid recipient who lives at home or in an ALF, but will result in a higher “patient responsibility” amount if in a nursing home), and provide some measure of an estate that can benefit the Medicaid recipient’s heirs after the person receiving Medicaid passes away.
However, like all Medicaid-planning techniques, this strategy has its drawbacks. Someone has to actively manage the property, there is the risk of having a bad tenant that requires eviction or damaging the property, and, of course, a closing may be required which will require the payment of closing costs, recording fees, and may be a lengthy process.
To discuss whether the rental real estate / income producing property medicaid strategy is right for you or your loved one, and how the pros and cons may compare to other Florida Medicaid planning techniques, call to schedule a consultation today.