Cost Segregation for Medical Office Buildings

A medical suite packs more specialized infrastructure per square foot than nearly any other commercial use. Every exam room carries a sink and casework; procedure rooms carry medical gas, isolated power, and specialty lighting; imaging areas carry shielding and equipment support; labs carry their own plumbing and power; and the whole clinical floor is finished in materials chosen for infection control rather than economy. Most of that layer serves equipment and clinical function, not the building, which is exactly what reclassifies.

That density is why Engineered Tax Services reports 30% to 55% typical acceleration for medical offices and clinics, the top of the standard commercial table. Dental and surgical buildouts, with chair connections and OR-grade systems, reliably push the upper half.

The second thing that distinguishes medical real estate is who owns it: very often the physicians themselves, through an LLC renting to their own practice. That structure is the right call, and it also walks straight into the self-rental rules, which can strand the study's loss unless the grouping analysis is done. Both layers are covered below, and they are the reason our physician tax practice treats MOB ownership as its own discipline.

The standard structure (practice in a PLLC, building in a separate LLC renting to the practice) is right for liability and exit flexibility. But the self-rental rule in the Section 469 regulations recharacterizes net rental income from your own business as non-passive while leaving net rental losses passive. A cost seg study produces exactly the losing year the rule punishes: a large rental loss that cannot touch your practice income, suspending instead as a passive carryforward.

The fix, where the facts support it, is the grouping election under Treasury Regulation 1.469-4: treating the rental and the practice as a single activity when they form an appropriate economic unit under common control. Grouped, the building's depreciation nets against the practice income it economically supports. The election has requirements and is sticky once made, so it is an analysis to run deliberately, ideally in the year the structure is created, and documented with the return.

Physicians investing in MOBs they do not practice in are ordinary passive landlords instead, back to the usual gates: REPS via a qualifying spouse, passive income, or a gain year. Our guide to real estate investing for physicians covers that branch.

• Equipment purchases (imaging, chairs, lab) are 5- or 7-year property from their own invoices, deductible via Section 179 or bonus without any study; keep them out of the building basis so nothing double-counts.
• Buildout expansions and suite renovations generate QIP at 15 years plus partial dispositions of replaced clinical systems, when the study documented components.
• Lease design between your LLC and practice: rent at defensible market rates, documented, since the same lease drives the self-rental analysis and any future practice sale diligence.
• Practice transitions: private equity and hospital acquirers usually want the practice, not the building; a studied, cleanly-papered MOB becomes a long-term rental asset or a sale-leaseback with known recapture math. Our practice sale tax guide covers the transaction side.
• Look-back studies for MOBs held for years without one; Form 3115 delivers the catch-up in a single year, ideally timed against a high-income year.

We coordinate the study through Engineered Tax Services, whose engineers document clinical systems at the room level. Taxstra runs the grouping analysis, implements the schedules, files Form 3115 where a look-back applies, and folds the result into the broader physician tax plan.

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