A Twist on Cost Segregation

A group of doctors own a medical building.  Not an uncommon practice.  Over time the doctors have paid down the loan and pay a lot of tax on the income.  They want more deductions.

In this group, the doctors of mixed specialties, all of whom will see their practices change as a result of Obamacare.  One of the impacts of Obamacare is it has made doctors in certain specialties seek hospital employment to keep their practices viable.  An affiliation assures them of a more manageable income stream without need to maintain a cost structure, which will be beneficial in the anticipation that revenues will be curtailed in the future.

Certain docs in the aforementioned group are choosing to become employees of the local hospital.  As part owners of the building, it behooves them to have the hospital take over the lease on their spaces and they keep their practices intact.

Hospitals must meet certain requirements and if the hospital takes over the leases, the HVAC system needs to be upgraded.  The hospital could pay for the improvements.  Or the docs as landlords can pay for the improvements and the hospital will pay for the improvements through increased rents.  But this increase in rent will put  the doctors further into the black on the building rental and paying even more taxes.  The improvements will have to be made to the whole building, making them 39 year property (meaning it takes 39 years to write it off), unless we do a cost segregation study.  Given the total cost of improvements, such a study is probably too expensive for the savings involved.

But wait, I have a plan.  Let’s have the nonprofit hospital pay for all the tenant improvements on the 39 year depreciation schedule, because as a non-profit, they don’t care about depreciation write-offs.  We’re having the docs pay for the HEPA filtration and positive pressure equipment.  Even though it affects the whole building including non-hospital affiliated docs, the new equipment does does absolutely nothing for care and comfort of the general public, and only affects patient care.  These improvements are indeed specific to doctor patient care and that puts them on the five year asset schedule.

On a commercial rental like this, no part of this new 5 year property qualifies for the IRS Sec. 179 deduction (100% write-off), but, currently this 5 year property does qualify for 100% (or 50%) bonus depreciation, meaning they could write off the whole thing in one year.

In doing this, in splitting what the tenant pays for and what the landlord pays for, we have in effect done a cost segregation.  The doctors will get their full write-off of deductions that would have been wasted had the hospital paid for it all.  Its a nice twist on cost segregation.