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 (5% for 1983-1986 and 3% before 1983) used to compute the medical deduction. Use the formula below (with amounts from the return on which the cost of the equipment was deducted) to figure the adjusted basis.

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 formula below to figure the increase.

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 was $5,000.

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

There was a $4,775 surplus of allowable itemized deductions over adjusted gross income ($9,775 - $5,000 = $4,775).

Allocating the nondeductible limit. To determine the part of the 7.5% limit that is allocable to the oxygen equipment, multiply the limit, $375, by the ratio of cost of the equipment, $3,000, to the total medical expenses, $3,750 [$375 x ($3,000 x $3,750) = $300]. Your basis in the equipment is this $300 portion of the cost of the equipment that is 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, 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. Your adjusted basis in the oxygen equipment includes this $1,319 [$4,775 x ($2,700 x $9,775) = $1,319]. This amount is the portion of surplus deductions allocable to the oxygen equipment. Your total adjusted basis in the equipment is $1,619 ($300 + $1,319).

Bill and Helen's Schedule A

Determining gain. This year, you sold the oxygen equipment for $2,000. 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.

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