Sale of Medical Property You may have a taxable gain if you sell medical equipment orproperty, the cost of which you deducted as a medical expense on yourtax return for a previous year. The taxable gain is the amount of theselling price that is more than the equipment's adjusted basis. Theadjusted basis is the portion of the equipment's cost that was notdeductible because of the 7.5% limit (5% for 1983-1986 and 3%before 1983) used to compute the medical deduction. Use the formulabelow (with amounts from the return on which the cost of the equipmentwas deducted) to figure the adjusted basis. figure the adjusted basis If your allowable itemized deductions were more than your adjustedgross income for the year the cost of the equipment was deducted, theadjusted basis of the equipment is increased by a portion of thesurplus itemized deductions. Use the formula below to figure theincrease. figure the increase Add the increase to the adjusted basis. The result is the newadjusted basis for purposes of computing the taxable gain. See chapter3 in Publication 544, Sales and Other Dispositions ofAssets, for information on the tax treatment of the gain. Example of sale of medical property.You have a heart condition and difficulty breathing. Your doctorprescribed oxygen equipment to help you breathe. Last year, you boughtthe oxygen equipment for $3,000. You itemized deductions and includedit 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, yourallowable itemized deductions totaled $9,775, figured as follows: Oxygen equipment $3,000 Medical services 750 Total medical expenses $3,750 Limit (7.5% of adjustedgross income of $5,000) -375 Allowable medicalexpense deduction $3,375 Other itemized deductions 6,400 Allowable itemized deductions $9,775 There was a $4,775 surplus of allowable itemized deductions overadjusted gross income ($9,775 - $5,000 = $4,775). Allocating the nondeductible limit. To determine thepart 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 ($3,000 $3,750) = $300]. Your basis in theequipment is this $300 portion of the cost of the equipment that isnondeductible because of the 7.5% limit. Tolouse cheap hotelsAllocating surplus deductions. To determine the part ofthe surplus itemized deductions that is allocable to the oxygenequipment, multiply the total available surplus deductions, $4,775, bythe ratio of the deductible portion of the amount paid for the oxygenequipment, $2,700 ($3,000 cost of equipment minus $300 attributable tothe 7.5% limit) to the total available deductions, $9,775. Youradjusted basis in the oxygen equipment includes this $1,319[$4,775 ($2,700 $9,775) = $1,319].This amount is the portion of surplus deductions allocable to theoxygen equipment. Your total adjusted basis in the equipment is $1,619($300 + $1,319). Determining gain. This year, you sold the oxygenequipment for $2,000. You realized a gain of $381 ($2,000 -$1,619). This amount represents the recovery of an amount previouslydeducted for federal income tax purposes and is taxable as ordinaryincome.