Is That Deductible? Managing My Medical Office Building

My Medical Office Building

Owning a medical office building isn't just about collecting rent checks—it's about managing a diverse set of responsibilities and making strategic decisions that can affect your financial health. My experience with my own medical office building, which I lease to a hospital, is a testament to this. In this blog post, I’ll share how this property generates income, the challenges that come with it, and the importance of understanding commercial property classes when negotiating leases. We'll also discuss the tax implications of these activities and why every dollar spent (or saved) matters for your bottom line.

The Triple Income Stream

When I first acquired this property, I knew it was a sound investment. The building was originally an auto-parts store, which I remodeled into a Class B commercial property—a category I'll explain in more detail shortly. My primary income comes from leasing the entire building to a hospital, which is now in the first year of a five-year lease. The lease’s timing was no accident; I made sure it would renew just before my retirement this year, securing a steady income stream as I transitioned into this new phase of life.

But that's not the only way this property makes money. The second source of income comes from leasing parking space to a nearby Mexican restaurant. This restaurant is land-locked, and they’ve relied on my parking lot for years. With the restaurant recently changing ownership—the new owner being the son of a local doctor—I see this as an opportunity to revisit the lease terms. I’ve kept the parking lease rate steady for years out of goodwill, but now might be the right time for an increase, particularly as property values have risen.

The third income stream comes from leasing a section of land at the back of my property to a small group of four trailers. I don’t own the trailers, just the land they sit on, but it’s a steady source of income nonetheless. Recently, the gentleman who owns the trailers expressed interest in purchasing the land from me. While I’m open to the idea, selling this piece of the property isn’t straightforward. It would require a fair amount of legal work, including surveys, regulatory checks, and creating an easement since the land is currently land-locked by the rest of my property. I have a price in mind—equivalent to 10 years' worth of lease income—but there’s much to consider before moving forward. We’ll see where this goes over time.

Property Management: The Unseen Costs

Owning property isn’t just about the income—it’s also about dealing with unexpected expenses. Just this week, I was contacted by the hospital leasing the building because the fire alarm system wasn’t functioning properly. Obviously, this isn’t something you can ignore, so I had to quickly arrange for a contractor to make the necessary repairs.

Of course, the repairs were not simple, as the 10-year-old electronic fire detection box from Bosch was no longer being manufactured, and therefore service and parts were limited. Much like consumer electronics, it feels like there are built-in expiration dates on products that will later force you to buy a new product from the manufacturer—you know, like the iPhone battery conspiracy that floats around annually :)

This summer also marked the time to repaint the exterior of the building. While I’m fortunate to have a trustworthy painter, this is still a costly endeavor. During the painting process, the contractor discovered some issues with the roof—issues that will require additional work from another contractor. Roof repairs can be notoriously expensive, and I’m bracing myself for what this might cost.

Each of these expenses has tax implications. For instance, repairs and maintenance costs, like fixing the fire alarm or addressing roof issues, are typically deductible as business expenses. Capital improvements, such as a major overhaul of the roof, may need to be depreciated over several years. Understanding these distinctions is crucial for maximizing your tax benefits and keeping more of your hard-earned money.

The Importance of Property Classes

When I first entered the world of commercial real estate, I had to learn about the different property classes and how they affect lease prices. Commercial properties are generally categorized into three classes: Class A, Class B, and Class C.

• Class A properties are the top-tier buildings—newer, high-end constructions with premium locations and tenants. These properties command the highest lease rates.

• Class B properties, like my building, are a step down from Class A. They’re older but still in good condition, located in less premium areas but still desirable. Lease rates for Class B properties are lower than Class A but higher than Class C.

• Class C properties are typically older buildings in less desirable locations. They may require significant renovations and generally attract tenants who are more budget-conscious.

Understanding these classifications is essential when setting lease rates. For example, my Class B property allows me to offer competitive rates to the hospital while still making a solid profit. Additionally, when negotiating leases, you have to consider factors like building age, location, and tenant type. This knowledge was also useful when a local realtor recently called me to inquire about the purchase process of my building, the costs of remodeling it from an auto-parts store, and how I structured my triple net lease. These are all key considerations for anyone looking to invest in or lease out commercial property.

Tax Implications and Business Decisions

Every business decision I’ve made regarding this property—from negotiating leases to managing repairs—has a tax implication. Here’s a breakdown:

• Lease Income: All rental income from the hospital, parking lease, and land lease is taxable. However, expenses related to these income streams, such as maintenance, property management fees, accounting, financing, and legal costs, are deductible.

• Repairs and Maintenance: As mentioned earlier, these are typically deductible in the year they are incurred. However, capital improvements may need to be depreciated over time, reducing your taxable income incrementally rather than all at once. I did do an cost segregation plan on this property so my depreciation is accelerated.

• Potential Land Sale: If I decide to sell the land leased to the trailers, the proceeds could be subject to capital gains tax. However, if structured correctly, I might be able to defer some of these taxes through a 1031 exchange, where I reinvest the proceeds into another investment property.

Managing a commercial property is a balancing act of generating income while controlling expenses, and understanding the tax implications of your decisions is crucial for long-term success.

Ready to Take Control of Your Professional Life?

Owning and managing a commercial property isn’t just for real estate moguls—it’s a smart move for physicians looking to diversify their income. In terms of medical office buildings, this an especially important opportunity if you are self-employed and feel you need a “practice with walls”. If you’re considering a similar self-employment path, you’ll need practical business knowledge, not just medical expertise. That’s where SimpliMD comes in. For only $99 you can become a member, and this deeper step will gain you access to over $2,500 worth of business products designed to empower physicians like you.

Creating income channels beyond your professional income is important for any doctor, but self-employed doctors have many more options for this. And if you’re ready to take the next step in your career by entering the world of self-employment and 1099 income, consider enrolling in my course, “Creating a Practice Without Walls.” In this course, you’ll learn how to create a micro-corporation that provides you with agency in the marketplace—so you’re not just a doctor, but a business owner in control of your professional destiny.