Many professionals rent space for decades and end up funding someone else's equity. Owning the building through a separate entity can build wealth, add deductions, and simplify an eventual practice sale.
The standard structure
- A real estate LLC, owned by the practice owners personally and not by the practice, holds title.
- The LLC leases the space to the practice under a written lease at fair-market rent.
- Rent is deductible to the practice, and the LLC reports it as rental income, offset by mortgage interest, property taxes, and depreciation.
Keeping the building outside the practice protects it from practice liabilities and lets owners sell the practice and keep the building, or vice versa.
If your practice is profitable and the owners are 45 or older, Summer Associates can plan the tax side of a cash balance plan with your actuary and TPA.The first consultation is free, with no obligation.
Book a free consultationDepreciation and cost segregation
A medical or dental office is 39-year nonresidential property. Specialized buildouts, such as dedicated plumbing for operatories, millwork, specialty electrical work, and parking, often support a substantial cost segregation allocation to 5-, 7-, and 15-year property that is eligible for 100% bonus depreciation. Interior improvements to an existing building may qualify as 15-year qualified improvement property. Much of the benefit is a matter of timing, because depreciation on the short-life components is largely recaptured as ordinary income when the building is sold.
Key numbers: 39-year building life · 100% bonus for property acquired after Jan. 19, 2025 · lease at fair-market rent with a written agreement.
The self-rental rule
Rental income is normally passive. When you rent property to a business in which you materially participate, however, the self-rental rule recharacterizes net rental income as nonpassive, while net losses stay passive. As a result, a first-year loss from cost segregation may not offset the practice's income.
A common solution is an election to group the rental with the practice as a single activity. The regulations allow grouping only when the activities form an appropriate economic unit and either each owner holds the same percentage of the practice and the building or one activity is insubstantial next to the other. Grouping can let rental losses offset practice income, but the election is hard to undo, so it calls for analysis first.
Setting the rent
Rent set too high or too low can shift income between owners with different ownership percentages, affect QBI calculations, and draw IRS scrutiny. Get a broker opinion of market rent and update it every few years. For QBI purposes, rent from an LLC owned 50% or more by the practice's owners is generally treated as SSTB income, so it phases out above the threshold in the same way as practice income.
A worked example
Three dentists, who own the practice and the LLC in identical proportions, buy a $2.4M building through an LLC, with $400,000 of the price attributable to land. A cost segregation study allocates $520,000 to short-life property, deducted in year one. The practice deducts rent of $180,000 a year. With grouping in place, the LLC's first-year loss of about $480,000 offsets practice income, which is worth roughly $200,000 in first-year tax at a 42% combined rate.
In Connecticut
Connecticut adds federal bonus depreciation back on individual owners' returns. If the dentists' building were in Connecticut, they would add back the $520,000 in year one and subtract $130,000 in each of the next four years, so the Connecticut share of the saving would arrive in years two through five instead of year one. Connecticut's conveyance tax on a commercial building is 1.25% to the state plus 0.25% to the town, paid by the seller, and a few towns may add up to 0.25% more. Selling more than 50% of the building LLC instead of the deed triggers Connecticut's controlling interest transfer tax of 1.11% of the property's value. The guide to Connecticut taxes for professional practices covers property tax and mill rates.
Common mistakes
- Titling the building in the practice entity.
- Having no written lease, or charging rent that ignores the market.
- Using cost segregation losses without analyzing the self-rental and grouping rules.
- Forgetting that partners with different ownership percentages in the practice and the building generally can't group.
How Summer Associates helps
Summer Associates plans the tax treatment of the real estate entity, supports the rent with a fair-market rent analysis, coordinates cost segregation, and analyzes the grouping election before you file.
Sources
- 26 CFR §1.469-2 (self-rental rule, Cornell LII)
- IRS Publication 925
- IRS Publication 946
- 26 CFR §1.469-4 (grouping rules, Cornell LII)
- 26 CFR §1.199A-5 (SSTB rules, Cornell LII)
- CGS §12-701 (Connecticut bonus depreciation add-back), chapter 229
- CGS §§12-494 and 12-495 (conveyance tax), chapter 223
- CGS §12-638b (controlling interest transfer tax), chapter 228b
This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.