Eventually, when their practice is stable and patient numbers are consistent, most dentists will begin to think about their financial position in a more strategic, long-term way.
When they reach this point, consulting with professional dentist tax planning can help them uncover ways to reduce their taxes that they might otherwise never have known about, much less considered, such as using real estate.
Real estate as a dental tax strategy
If you own the building that hosts your dental practice, not only does it provide you with a long-term location for your business, but it also creates a real estate investment separately, that might increase in value over time.
Often, the structure looks like this:
- The practice operates as a professional entity or S Corporation
- The building is owned by a separate LLC
- The practice pays rent to the LLC
In this way, practice rent turns into a deductible business expense, while the LLC receives rental income and can claim deductions associated with owning the property. Over time, the dentist is paying rent to a property they own, while the building itself becomes valuable equity.
What are the primary tax benefits of owning commercial real estate?
Depreciation is one of the main tax advantages for dentists who own the building their practice operates in. Typically depreciating over a period of 39 years, commercial buildings can be used as a business expense, with a portion of the building’s cost deductible every year. As a non-cash deduction, depreciation is particularly valuable.
There are also ways of accelerating the tax benefits however, such as with a cost segregation study. This meticulously analyses the building and separates some components into shorter depreciation schedules. Rather than treating the property as a 39-year asset, some parts of it (such as custom operatories, cabinetry or plumbing) might qualify for depreciation over a period of 5, 7 or 15 years. These features enable dental office properties to reclassify up to 35% of the buildings costs into faster depreciation categories.
Bonus depreciation, which allows for a business to deduct some of its qualifying assets immediately as opposed to spreading it over a number of years, can also reduce taxable income significantly in the same year that the property is bought or completed.
Renovating or expanding can also create deductions, if they qualify under Qualified Improvement Property rules. These allow for some upgrades to be depreciated quicker than the standard building schedule, such as upgrading flooring, or redesigning the practices’ layout.
Specialized buildouts and dental equipment might also qualify for Section 179 deductions or shorter depreciation schedules.
Is owning the building the right choice for every dentist?
Although it can offer tax advantages, owning the building in which their practice operates isn’t necessarily the right decision for every dentist. Less capital upfront is needed for leasing, and future relocations become much simpler. Upkeep of the building is also someone else’s responsibility when you lease.
If you’re not sure if buying the practice building is the right decision for you, seeking advice from a local dental accounting firm could help you decide.
Real estate ownership for dentists can provide powerful opportunities in the form of tax deductions, while also enabling dentists to build equity in a property that supports the practice. Whatever decision you ultimately make, ensure that it is made based upon a thorough evaluation of your goals, long-term plans and overall financial strategy.