Should our practice own its building through a separate entity?

For most physician, surgical, and dental practices that own their building or plan to buy one, a separate entity is the better setup. The usual structure is an LLC that holds the real estate and leases the space to the practice. The practice pays rent to the LLC every month, the same way it would pay any landlord. The owners hold the LLC personally instead of through the practice.

The first reason is liability. A practice carries clinical risk. A building carries property risk, like a fall in the parking lot or a dispute with another tenant. Keeping them in separate entities makes it less likely that a claim against one reaches the assets of the other. It isn’t a complete wall. Commercial lenders usually require personal guarantees, and malpractice coverage still matters. But the building no longer sits inside the entity that treats patients.

The second reason is flexibility as ownership changes. The owners of the building don’t have to be the same people, in the same percentages, as the owners of the practice. A new physician can buy into the practice without finding money for a share of the real estate. A retiring partner can leave the practice and keep collecting rent. When the practice is sold, buyers often don’t want the building, so the owners can keep it as an investment or sell it on its own.

The lease has to be real. Put it in writing, set rent at fair market value, and spell out who pays property taxes, insurance, and repairs. Healthcare adds another layer. When physicians who refer patients to the practice also own its landlord, the arrangement can raise Stark Law and Anti-Kickback Statute questions. The office space exceptions generally expect a signed written lease, a term of at least a year, and rent that is set in advance and not tied to referrals or practice revenue. A healthcare attorney should set this up before the LLC buys the property or signs the lease.

Be careful if the practice already owns the building. Moving appreciated real estate out of an S corporation or C corporation can be treated as a sale for tax purposes and create a tax bill nobody expected. Work through the timing and tax cost before anything gets retitled.

On the tax side, rent is a deductible expense for the practice and rental income for the owners, with depreciation on the building offsetting part of it. Renting property to a business you work in follows different rules than ordinary rental property. Net income from that rent is generally treated as nonpassive, so it can’t absorb passive losses from other investments. That’s worth knowing before anyone counts on the building as a tax shelter.

Each entity needs its own bank account, its own books, and its own tax reporting. A multi-member LLC files a partnership return. A single-member LLC usually shows up on the owner’s personal return. Rent should move between accounts on schedule every month. Building costs like the mortgage, property tax, and roof repairs should be paid by the LLC, not the practice. When those lines blur, the liability protection weakens and the tax returns get harder to support.

Our multi-entity bookkeeping keeps separate books for the practice and the building in QuickBooks Online, with rent recorded the same way on both sides so the two sets of books tie out. It works alongside the rest of our medical practice bookkeeping and tax services, including the returns for both entities and the owners.