The year 2025 represented a watershed moment for American demographics. It was the year a record-breaking number of individuals reached the age of 65, with an average of roughly 11,400 Americans hitting this milestone every single day. For families here in Burlingame and across the San Francisco Peninsula, this ‘Silver Tsunami’ is more than just a statistic; it has profound implications for retirement planning, healthcare management, and the preservation of generational wealth. As our clients age, the focus often shifts toward ‘aging in place’—modifying the family home to ensure it remains a safe, accessible sanctuary for years to come.

The Critical Intersection of Home Safety and Tax Planning

Data from the U.S. Centers for Disease Control and Prevention (CDC) highlights a sobering reality: falls are the primary cause of injury among adults aged 65 and older. In fact, nearly 30% of seniors report falling at least once within a 12-month period. To mitigate these risks and accommodate age-related physical limitations, many homeowners are investing in significant renovations. These projects range from installing simple grab bars in showers to complex structural changes like widening hallways for wheelchair access or installing residential lifts. While these modifications provide peace of mind and safety, they also carry a hidden financial advantage: the potential for significant tax benefits.

Typically, the costs associated with home improvements are not immediately deductible. Instead, they are added to the home’s tax basis, which helps reduce the taxable gain when the property is eventually sold. However, a specific exception exists within the Internal Revenue Code for medical expenses. If the primary purpose of a home modification is medical care, the costs may be deductible in the year they are incurred. The IRS defines deductible medical expenses as those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.”

Determining Deductibility: The Medical Necessity Standard

If you are modifying your residence because you, your spouse, or a dependent has a specific medical need, the expense may qualify as a medical deduction. The caveat is that the deduction is limited to the portion of the cost that exceeds the resulting increase in the home’s market value. For example, if a modification costs $50,000 but increases the property value by $30,000, only $20,000 is eligible for consideration as a medical expense.

While the IRS does not strictly require a written prescription for these modifications, we strongly advise our clients to maintain robust documentation. If your return is ever selected for review, you must be able to demonstrate a direct link between the expenditure and the medical care of the occupant. A formal letter from a physician detailing the specific medical necessity and the recommended modifications serves as an essential piece of evidence in substantiating your claim.

IRS-Recognized Improvements with Minimal Value Impact

The IRS acknowledges that certain modifications made for accessibility often do not increase a home’s resale value—and in some cases, such as lowering kitchen cabinets for a wheelchair user, they might even decrease it. For these specific types of improvements, the full cost is generally treated as a medical expense. These items include, but are not limited to:

• Constructing entrance or exit ramps for the residence.
• Widening doorways at entrances or exits to accommodate walkers or wheelchairs.
• Modifying interior hallways and doorways for easier navigation.
• Installing support bars, railings, and other stability modifications.
• Lowering or modifying kitchen cabinets and specialized equipment.
• Repositioning electrical outlets and fixtures for better accessibility.
• Installing porch lifts, stair lifts, or other mechanical elevators.
• Upgrading fire alarms, smoke detectors, and warning systems for those with sensory impairments.
• Modifying stairways and hardware on doors.
• Bathroom renovations including roll-in showers, lower sinks, and grab bars.
• Grading the exterior ground to ensure level access to the home.
• Replacing flooring with non-slip surfaces or leveling floors to prevent tripping hazards.

Navigating the 7.5% AGI Threshold and Standard Deductions

It is important to remember that medical expenses are only deductible to the extent they exceed 7.5% of your Adjusted Gross Income (AGI). Furthermore, you must itemize your deductions to claim them. With the current high standard deduction amounts, many high-net-worth families in the Burlingame area may find that they do not reach the threshold to itemize every year. Does this mean the tax benefit is lost? Not necessarily.

Even if you cannot claim the modification as a current-year itemized deduction, the costs—including those that might not strictly meet the IRS medical necessity test—can be capitalized. By adding these costs to your home’s tax basis, you effectively lower the capital gains tax liability when the home is eventually sold or transferred. In the context of estate planning and wealth preservation, this strategy ensures that the investment in your home continues to provide a financial benefit long after the construction is complete.

The ‘Hot Tub’ Dilemma: Medical Treatment vs. Personal Luxury

One of the most frequent questions we receive involves the deductibility of luxury items like hot tubs, swimming pools, or saunas. While it is possible to claim a hot tub as a medical expense, the IRS views these with a high degree of skepticism. To qualify, the primary use must be for the treatment of a specific medical condition (such as chronic arthritis or fibromyalgia) rather than for general relaxation or wellness.

To successfully navigate this, we recommend a multi-step approach: First, secure a detailed prescription from a licensed MD explaining why hydrotherapy is medically required. Second, hire a certified appraiser to determine the exact impact on your home’s value. Consider this example: A taxpayer installs a hot tub for $21,000 on a doctor’s orders. An appraiser determines the installation increases the home’s value by $20,000. In this scenario, only $1,000 is eligible as a medical deduction. The remaining $20,000 is added to the home’s basis.

Critical Compliance Guidelines

• Primary Use: You must prove the primary function is for the “diagnosis, cure, mitigation, or prevention of disease.”
• Apportionment: If other family members use the hot tub for recreational purposes, you may need to apportion the costs, further limiting the deduction.
• Reasonable Cost: A modest, therapeutic unit is much easier to defend than a custom-built, multi-person spa with an architectural deck.

The same rigorous standards apply to elevators, lap pools, and saunas. Because these items often trigger IRS scrutiny, keeping meticulous records—including ‘before and after’ photos, all receipts, and a log of medical usage—is paramount.

Partner with a Strategic Tax Advisor

At Sullivan & Company CPA Inc., we specialize in helping high-net-worth individuals and families navigate the complexities of tax compliance and estate planning. Whether you are modifying a residence for medical reasons or planning for the long-term transfer of property, we provide the clarity and strategic foresight needed to protect your legacy. If you are planning home modifications and want to understand the tax implications for your specific situation, we invite you to contact our Burlingame office today for a consultation.

Beyond the immediate medical necessity, there are broader implications for those engaged in sophisticated estate planning and generational wealth transfer. For our clients in Burlingame and the surrounding San Francisco Peninsula, a primary residence often represents a significant portion of the family estate. When you invest in medical modifications, you are not simply paying for a utility; you are making a strategic adjustment to a major asset. This is where the intersection of forensic accounting and tax compliance becomes vital. If these improvements are not properly categorized and documented at the time of construction, you risk losing the benefit of a higher tax basis during a future valuation or estate settlement.

Consider the scenario of a multi-generational household. Many high-net-worth families are choosing to modify existing estates to accommodate aging parents. In these instances, the definition of a “dependent” for medical expense purposes is often broader than the definition used for the dependency exemption. You may be able to deduct the medical modifications made for a parent even if that parent does not qualify as your dependent for other tax purposes, provided you provide more than half of their financial support. This nuance requires a careful analysis of the parent’s income and the total support provided by the family, a task where forensic accounting expertise proves invaluable in substantiating the claim to the IRS.

Furthermore, when we discuss the ‘basis’ of a home, we are looking at the long-term tax trajectory of the property. For a family office or a trust-owned residence, the documentation must be flawless. The IRS often scrutinizes large adjustments to basis, especially those stemming from “medical necessity” that may look like luxury renovations to an untrained eye. We recommend maintaining a permanent “Basis File” that includes not only the contracts and canceled checks but also the appraisal reports that justify why a specific cost did or did not increase the market value of the property. In our experience with controversy consulting, having a contemporaneous appraisal from a qualified professional is the strongest defense against an IRS challenge regarding the valuation of the improvement.

The role of valuation in these projects cannot be overstated. Unlike a standard kitchen remodel, where market data is abundant, medically required modifications are niche. A roll-in shower or a lowered countertop may actually limit the pool of potential buyers in a high-end market, potentially decreasing the home’s value. From a tax perspective, this is beneficial, as it allows for a larger immediate deduction. However, from a wealth management perspective, it requires a balanced view of the property’s overall utility and its future marketability. Our team works closely with fiduciaries and wealth managers to ensure that these home modifications align with the broader financial objectives of the family, preventing a short-term tax win from creating a long-term valuation headache during a probate or litigation process.

It is also essential to distinguish between the capital expense of the installation and the ongoing operating costs. While the initial cost of installing a home elevator or a therapy pool is subject to the valuation-increase limitation, the recurring expenses to operate and maintain that equipment—such as specialized insurance, electricity, and repairs—are generally deductible in full as medical expenses, provided the medical necessity is maintained. These recurring costs are not subject to the property-value-increase rule, though they still must exceed the 7.5% AGI threshold when combined with your other medical outlays.

Finally, let’s address the complexities of dual-use items. These are frequently the subjects of audits because of their inherent nature. To the IRS, an elevator might look like a luxury convenience for moving groceries between floors rather than a medical necessity for an occupant with mobility issues. A successful deduction hinges on the ability to demonstrate that the primary intent was to mitigate a physical infirmity. We assist clients in navigating the ‘audit-proofing’ of these expenses by ensuring the medical evidence, the construction specifications, and the valuation data all tell a consistent and defensible story. This tech-forward approach to document management ensures that every receipt and physician’s note is preserved for the life of the asset.

Whether you are dealing with a forensic investigation of past expenses or proactively planning for future needs, the key is integration. Your home modifications are not isolated events; they are part of your medical history, your tax record, and your family legacy. By approaching these projects with the same level of technical rigor you would apply to a business transaction, you can maximize your tax benefits while ensuring your home remains a safe and valuable asset for generations to come. If you have questions about how these rules apply to your specific estate or would like to review the tax basis of a property in transition, our team is ready to provide the professional guidance you need to move forward with confidence and clarity.