Over a decade ago, I made a pivotal decision that would profoundly reshape my financial landscape and secure my future: purchasing the medical office building and renting it to the hospital as part of my employment agreement. This strategic move proved to be one of the most significant and rewarding choices I've ever made. Not only did it offer substantial tax savings with my ownership, but it also transformed into a million-dollar asset over time. What makes this achievement even more remarkable is that the hospital's rent covered the mortgage expenses, essentially allowing them to pay off this valuable property on my behalf.

Now, as I look towards retirement, this investment stands as a testament to foresight and planning, providing me with a robust cash flow that ensures financial freedom and peace of mind for years to come.

This is why I love the work that my friends Leti and Kenji are doing with The Semi-RetiredMD. Check out their article below.

The Medical Practice Tax Loophole: A New Tax Strategy for Doctors

From the Semi-Retired MD

In 2018, we were the very first to bring the powerful tax benefits of Real Estate Professional Status (REPS) to the forefront for doctors. Our article, A Primer on Real Estate Professional Status for Doctors, helped doctors across the country unlock significant tax savings through real estate investments. Shortly thereafter, we coined the term PLSF-REPS (Public Loan Service Forgiveness with REPS), a strategy that allows doctors to have their student loans forgiven while investing in real estate. 

Today, we’re excited to bring to the forefront another novel strategy: the Medical Practice Tax Loophole. This strategy allows you to shelter your medical practice income without needing to qualify for Real Estate Professional Status, using the grouping election. 

How the Medical Practice Tax Loophole Works

The Medical Practice Tax Loophole relies on the grouping election under Section 469 of the Internal Revenue Code, which allows you to group your medical office building with your medical practice as a single activity. This means that any losses generated by your real estate, often due to depreciation, can be used to offset your medical practice income.

Here’s how it works:

1. Separate Entities: Most doctors would create two separate entities—one for their real estate (LLC) and one for their medical practice.

2. Rental Income: The medical practice would pay rent to the LLC that owns the office building.

3. Expenses and Depreciation: The office building would incur usual expenses like mortgage payments, utilities, property taxes, and insurance. Additionally, you would claim depreciation on the property.

4. Paper Losses: As long as the total expenses, including depreciation, exceed the rental income, the LLC will generate a paper loss. This loss, due to the grouping election, can offset the income from your medical practice.

Accelerated Depreciation

To maximize the benefits, you can accelerate depreciation using cost segregation. This allows you to front-load depreciation into the first several years, resulting in significant losses on paper. These losses can then be used to shelter a substantial portion of your medical practice income, potentially saving you thousands of dollars in taxes each year.

No Need for Real Estate Professional Status

The key advantage of the Medical Practice Tax Loophole is that it does not require you to qualify for Real Estate Professional Status (REPS). Many doctors, especially those working full-time in their practices, struggle to meet REPS criteria. With this strategy, you can still enjoy substantial tax benefits without needing to dedicate 750 hours or more annually to real estate activities.

Understanding the Downsides of Grouping (and Why They Don’t Apply Here)

One of the common downsides of the grouping election is that suspended passive losses from the real estate activities can’t be freed up until all grouped activities, including the medical practice, are sold. However, in this scenario, it’s unlikely that you would face this issue because the losses from the real estate will consistently offset your medical practice income. 

Partner with a Real Estate-Savvy CPA

While the Medical Practice Tax Loophole presents an incredible opportunity, executing it correctly requires the expertise of a skilled CPA, preferably one with deep experience in real estate. Unfortunately, most CPAs are not familiar with this strategy and may not feel comfortable implementing it. If you want to partner with one of our real estate-savvy CPA you can find a list of our preferred CPA partners here.

If you want to learn how to buy a medical office the right way and implement this along with other proven real estate strategies to grow wealth and shelter income, we invite you to take our Zero to Freedom course. This course is designed specifically for doctors and high-income earners like you who want to achieve financial independence through real estate. If the course isn’t currently available, be sure to sign up for the waitlist so you don’t miss out on the next opportunity!

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page.

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.