Medical Practice Tax Loophole for Self-Employed Doctors Who Own Their Their Office Buildings
Jan 15, 2025
At SimpliMD, we believe self-employed doctors should explore every avenue available to optimize their financial standing. For those of you who own the buildings where you practice, there’s a unique strategy that may help you reduce your tax burden—without the need to meet Real Estate Professional Status (REPS) requirements. You can check out a primer on REPS here.
Today, we’re excited to feature an article from one of our partners, The Semi-Retired MD, a resource that empowers you to maximize your financial independence through real estate investing. In this post from Leti and Kenzi, they’ll introduce what they call the Medical Practice Tax Loophole, a tax approach that leverages the grouping election to help shelter income from your medical practice through depreciation on your office building.
Disclaimer: The information provided is for educational and informational purposes only and is not legal, tax, or financial advice. Please consult with a qualified tax professional to determine if this strategy fits your individual situation.
Take it away Leti and Kenzi with The Semi-Retired MD…
How the Medical Practice Tax Loophole Works
The Medical Practice Tax Loophole is a straightforward tax strategy that allows you to combine, or “group,” your medical office building with your medical practice as a single business activity under Section 469 of the Internal Revenue Code. This combined approach can help offset your medical practice income with the depreciation-related losses of your building, resulting in significant tax savings.
Here’s how it works:
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Separate Entities: Most doctors set up two separate entities—an LLC for their real estate and another entity for their medical practice. This separation can help keep finances and operations distinct while enabling tax benefits.
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Rental Income: Your medical practice would then pay rent to the LLC that owns the office building, creating a clear revenue stream for the real estate entity.
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Expenses and Depreciation: The office building LLC incurs regular expenses (e.g., mortgage payments, property taxes, insurance) and can claim depreciation on the property.
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Paper Losses: Because the building’s expenses and depreciation typically exceed the rental income, this generates a “paper loss” for the real estate LLC. By electing to group this loss with your medical practice income, you can reduce your overall taxable income.
Accelerated Depreciation for Even Greater Savings
To make the most of this strategy, you might consider accelerated depreciation through cost segregation. This allows you to “front-load” the depreciation expense in the early years, which can further offset your medical practice income. This results in substantial tax savings early on, giving you even more cash flow to reinvest in your practice or other assets.
No Need for Real Estate Professional Status (REPS)
One of the most attractive aspects of the Medical Practice Tax Loophole is that you don’t need to meet the stringent Real Estate Professional Status requirements. Many doctors who work full-time find it difficult to qualify for REPS, which requires a minimum of 750 hours annually in real estate activities. With this strategy, you can enjoy the benefits of offsetting your medical practice income without the additional time commitment.
Understanding Grouping’s Downsides (and Why They May Not Apply Here)
A common drawback of grouping is that any passive losses from the real estate investment become “suspended” and cannot be released until the grouped activities (in this case, both your medical practice and the office building) are sold. However, since the losses will be actively offsetting medical practice income, the suspended loss limitation is less of an issue in this specific situation.
Work with a Real Estate-Savvy CPA
The Medical Practice Tax Loophole is a nuanced strategy and requires careful implementation. Finding a CPA well-versed in real estate tax law will be key to realizing the benefits of this strategy. The Semi-Retired MD has a network of real estate-savvy CPAs who understand this unique approach and can guide you through setting it up.
For self-employed doctors, owning your practice’s real estate can open the door to creative financial strategies like the Medical Practice Tax Loophole. Taking the time to understand and employ strategies like this can enhance the financial viability of your practice, helping you maximize your income and secure a stronger financial future. We at SimpliMD encourage you to evaluate the potential of this tax benefit and consult with a tax professional to determine if it’s the right fit for your practice.
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