Summerhill View, a 60-bed residential unit, will be built on the site of the former Glenside home on Victoria Road, which was demolished in 2015.
It will replace Reayrt ny Baie on Albert Terrace which is deemed no longer fit for purpose as it does not comply with the national minimum care standards.
The development will also allow the Sweetbriar dementia care unit to be transferred back into the residential care service from Thie Meanagh.
Health and Social Care Minister David Ashford will seek Tynwald approval of his department spending not more than £11,700,000 for the new residential and resource centre.
He said the modernisation and replacement of residential accommodation for older people to meet current and future standards is one of the DHSC’s key strategies.
A 2011 report on transforming adult social care in the island predicted the number of people aged 65-74 will increase by 63% up to 2026, while the ’super-elderly’ group aged 85-plus will increase by 47%.
It concluded there is an over-reliance on residential care (compared with UK) for over-65s with a large percentage supported in private sector beds through income support payments.
The cost to fund each residential care place in the Isle of Man is about £33,000 per annum while average home care can be delivered for around £4,000, the report found.
Reayrt ny Baie does not meet present needs as bedrooms are too small for those with mobility issues or higher than average dependency levels.
En-suite toilet facilities are too small, corridors too narrow and lifts inadequate for wheelchair users.
The new development will include a day centre for up to 20 people.
Two potential sites in Douglas were considered - Glenside and former Victoria Road prison.
The Glenside site was chosen as it is already zoned for residential care use unlike the prison site where any planning application could be open to challenge.
There was public protests outside Tynwald in 2012 when it was announced that the Glenside home was to be closed as part of a shake-up of adult social care services.
The move was aimed at saving government £3m and seeing more elderly people receiving care in their own homes.
Glenside’s 59 residents were offered alternative accommodation.
Two planning appeals were held which delayed the scheme by nearly three years and had a significant impact on costs, an explanatory memorandum to Tynwald members notes.
Funding of £751,000 for design fees and enabling works for the 60-bed residential facility and day centre has already been approved.