Sale of Medical Property

You may have a taxable gain if you sell medical equipment or property, the cost of which you deducted as a medical expense on your tax return for a previous year. The taxable gain is the amount of the selling price that is more than the equipment's adjusted basis. The adjusted basis is the portion of the equipment's cost that was not deductible because of the 7.5% limit used to compute the medical deduction. Use the formula below to figure the adjusted basis.

If your allowable itemized deductions were more than your adjusted gross income for the year the cost of the equipment was deducted, the adjusted basis of the equipment is increased by a portion of the surplus itemized deductions. Use the following formula to figure the increase.

Add the increase to the adjusted basis. The result is the new adjusted basis for purposes of computing the taxable gain. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for information on the tax treatment of the gain.

Example of sale of medical property. You have a heart condition and difficulty breathing. Your doctor prescribed oxygen equipment to help you breathe. Last year, you bought the oxygen equipment for $3,000. You itemized deductions and included it in your medical expense deduction.

Last year you also paid $750 for deductible medical services and $6,400 for other itemized deductions. Your adjusted gross income (AGI) was $5,000.

Taking into account the 7.5% limit on medical expenses, your allowable itemized deductions totaled $9,775, figured as follows:

This year you sold the oxygen equipment for $2,000. You must report on this year's tax return part of the $2,000 as ordinary income. To compute the part of the sales price that is taxable, you must do the following:

• Figure the part of the 7.5% of adjusted gross income limit (the nondeductible limit) that is allocable to the oxygen equipment as the equipment's adjusted basis.
• Figure the part of the surplus itemized deductions that is allocable to the oxygen equipment as an addition to the adjusted basis.
• Determine the gain by subtracting the total adjusted basis from the selling price.

Allocating the nondeductible limit. As stated above, some of the $375 you were not allowed to deduct as a medical expense on last year's return becomes the adjusted basis of the equipment and can be used to reduce the amount you must now report as income. To determine the part of the 7.5% limit that is allocable to the oxygen equipment (see the first formula shown earlier), multiply the overall nondeductible limit, $375, by the ratio of cost of the equipment, $3,000, to the total medical expenses, $3,750 [$375 × ($3,000 × $3,750) = $300]. Your adjusted basis in the equipment is this $300 portion of the cost of the equipment that last year was nondeductible because of the 7.5% limit.

Allocating surplus deductions. To determine the part of the surplus itemized deductions that is allocable to the oxygen equipment (see the second formula shown earlier), multiply the total available surplus deductions, $4,775, by the ratio of the deductible portion of the amount paid for the oxygen equipment, $2,700 ($3,000 cost of equipment minus $300 attributable to the 7.5% limit) to the total available deductions, $9,775. In this example the result is $1,319.

Your total adjusted basis in the equipment is $1,619 ($300 + $1,319).

Determining gain. You realized a gain of $381 ($2,000 - $1,619). This amount represents the recovery of an amount previously deducted for federal income tax purposes and is taxable as ordinary income.

Previous| First | Next

Publication Index | IRS-Forms Main | Home