Tired of paying someone else rent for your medical practice office? Thinking of purchasing your own office space? Purchasing could be a wise investment decision depending on the real estate market in your area. Looking for a tax write-off? Renting office space back to your practice may not work as well as you think.
For a variety of reasons, real estate is usually held in a separate entity from the practice. The practice then pays rent to the separate entity (call it “Office LLC”). For tax purposes, the rent should not be above fair market value. If comparable rentals are not available in your area you may need a real estate professional’s guidance on setting the rent. A written lease agreement should be used to establish the rent and any other expenses that the practice may pay directly, such as utilities or maintenance fees.
Your practice will deduct the rent expense just as it would payments to another landlord. Office LLC will deduct the property expenses, including mortgage interest (not the principal portion), real estate taxes, depreciation, etc. If rental income exceeds the expense, you will have taxable income on your personal tax return. However, as long as the rental income is from an entity in which you actively participate, it will not be subject to the additional net investment income tax. Now for the bad news: currently, if expenses exceed the income you may not be able to deduct the loss. Because the loss is generated from a self-rental it may not be used to offset any other passive income (e.g. rental) you may have. You should discuss with your tax advisor structuring the self-rental in a manner that allows you to currently deduct the loss or to help you determine the appropriate rental rates.
If you have questions about or would like more information on self-rentals, please contact a tax specialist at 301.231.6200.