From increasing wealth to saving on taxes, the benefits of owning your building are real.
When you run a medical practice, you will have to cut a check every month for your team as well as your office space. In fact, your rent is probably going to be your highest or second highest cost of the business! Let’s take a look at how beneficial it can be to optimize this expense.
As with any financial decision, you’ll want to make sure you are looking at all of the potential benefits and risks of each move. Take a look at the current property market in your area, the current financial position of your firm, and how long your practice has been running to help to determine risk.
Like many business fundamentals, there is no answer that fits everyone, so it’s always best to get expert advice where you can.
Now, let’s dive into the benefits of owning your own building.
You can increase your net worth
Instead of paying someone else every month through a rental check, you can be paying into your own assets instead. This is usually at least a few thousand dollars each month, and enables you to have a new revenue stream without taking on extra overheads.
In fact, you may actually end up paying less on your mortgage than you did on your rent.
You can save on tax
Typically, you will be advised to form a Limited Liability Company (LLC) and this LLC will own the real estate.
The practice entity can pay the LLC for rent and operating expenses, writing all of this off and saving on taxes in the exact same way that they would if they were paying an external landlord.
In addition, the LLC holding the property can also write off many other additional expenses that will reduce the tax liability of the LLC from the earned rental income. This includes expenses such as mortgage interest, property taxes, repairs, maintenance, cleaning fees, landscaping, etc. The LLC can also depreciate the building and other major improvements to further reduce the tax liability.
It gives you a retirement / exit strategy
Most of us by now understand the importance of saving for retirement, and you likely already put some money away each month to get ready for it. However, you can increase your retirement pot even more by leveraging ownership of your healthcare office.
If you are just renting, when you close up shop you simply stop paying the rent. The only thing you can sell, potentially, is the practice itself. If you own the property, then there are other options for you:
You can sell the property to the practice buyer either by cashing out or using the 1031 exchange and purchasing another similar property.
You can sign a long term lease with the buyer enabling you to receive additional cash flow long after you’ve sold the practice.
You can lease out the space to another tenant other than the buyer, and sell further down the line.
Sometimes, your office building is worth more than the practice itself!
If you make losses you can offset your income
Losing is not all bad news! The good thing is, even if you do happen to generate losses from your real estate activity, it can be used to offset your income for tax purposes.
Note that these types of losses are only acceptable up to $25,000 and under the provision that you have participated significantly in the management decisions of the property. If you have opted into the LLC option stated above, this likely wouldn’t apply to the wages you made as a doctor in your practice.
You can take advantage of cost segregation
Cost segregation is a commonly used strategic tax tool used to increase cash flow by speeding up depreciation. Essentially, when you buy a property, you don’t just buy the property, but the items inside the property. These items generally have a much faster depreciating time, therefore can be written off much quicker than the property itself. This will postpone your federal income tax liability to later years, allowing for a more favorable cash flow in the earlier years of your property owning.
So, have you decided you want to buy your medical practice building?
If so, attorneys and tax advisors generally recommend buying the property through an LLC or Limited liability Partnership (LLP) for several reasons:
Alexis E. Gallati, EA, MBA, MS Tax, CTP, is the founder and Lead Tax Specialist at Cerebral Tax Advisors, and the author of the book “Advanced Tax Planning for Medical Professionals”. Not only does she have extensive experience in high-level tax planning strategies and multi-state tax preparation, but she also holds two master degrees, and serves as an Enrolled Agent, NTPI Fellow, and Certified Tax Planner. Alexis grew up in a family of physicians and is married to a private practice physician. Physicians and healthcare professionals all over the country work with Cerebral Tax Advisors to lower their personal and business taxes through court-tested and IRS approved tax strategies.