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  • Buying to real estate of medical practice

    I am buying into my medical practice and there is real estate in a separate LLC which is rented to the practice. I have doubts about how good of an investment the real estate LLC is, but wanted to ask if I am grasping the concepts correctly.

    I understand the benefits of owning the real estate, ie a landlord and tenant working well together, tax benefits etc. My question is, other than a friendly landlord tenant relationship, what other advantages are there vs buying a separate piece of property and renting it out? Yes your office is paying the rent which goes to pay your mortgage, but in the second scenario your tenant is paying rent which is going toward your mortgage as well. Are the tax implications any different? I assume you deduct rent in the practice either way, and on the landlord side you are applying rent against expenses, mortgage and depreciation in both cases?

    Second, can the practice require you to buy into the separate LLC entity as a condition for offering you partnership in the medical practice?

    Finally, if I do not buy in the real estate, are there legal requirements that the practice does not pay above "fair market value" rent? Would that violate Stark law?

    Thanks!




  • #2
    1) real estate. Johanna might chime in with an better explanation.
    Current tax
    Liability
    Future ability to do a like kind exchange when sold.
    Three factors other than just rent.
    2) Partnerships can set their buy-in terms. I believe there are disclosures required for ownership interest in owned facilities patients are referred to, not facilities used for office/clinic. You have a two part question here. Partnership and Stark.
    Not an expert, maybe others can refine.

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    • #3
      The main consideration when buying real estate is, of course, to invest wisely. I'm typically in favor of a physician owning (and controlling the use of) the property where the practice is located. Not necessarily so with a group of physicians. I would be very hesitant to invest in a partnership-owned RE entity that does not pay FMV rent.

      Tax implications of the lease agreement are the same no matter who leases the property.

      A small advantage of RE is that rent payments are not subject to FICA taxes.

      Never put RE into a corporation.

      Yes, a partnership can require you to do anything it wants (legal) for you to be admitted.

      Not enough understanding of the nuances of Stark to comment.

      You really to analyze that on a local level (income tax returns, lease agreements, inc stmt/bal sheet, GL), preferably with an experienced CPA.
      Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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      • #4
        We require all Partners to buy into the medical practice, real estate, and ancillaries.

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        • #5
          One advantage it seems to me is that after retirement you can continue to receive the rent payments. I have known several retired docs who continued to receive rental payments from their previous practice locations.

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          • #6
            One thing to consider is that if you are a partner in the practice, but not in the building the above FMV rent is cutting into your take home. Why, as a tenant, would you ever want to pay above FMV? You wouldn't. You only put up with it when you are an employee and it doesn't affect you or you're also the landlord, which allows you to shift profit from the medical practice to the real estate entity. I would advise that if you are a partner in the practice, but not in the real estate that you argue to decrease your percentage of the practice overhead accordingly.

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            • #7
              Originally posted by GUtiger View Post
              One thing to consider is that if you are a partner in the practice, but not in the building the above FMV rent is cutting into your take home. Why, as a tenant, would you ever want to pay above FMV? You wouldn't. You only put up with it when you are an employee and it doesn't affect you or you're also the landlord, which allows you to shift profit from the medical practice to the real estate entity. I would advise that if you are a partner in the practice, but not in the real estate that you argue to decrease your percentage of the practice overhead accordingly.
              I'm not following this. The practice has to pay rent to someone. Why should OP get a discount on overhead if he doesn't buy in?
              Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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              • #8
                Originally posted by jfoxcpacfp View Post

                I'm not following this. The practice has to pay rent to someone. Why should OP get a discount on overhead if he doesn't buy in?
                Let's say market rent is $10,000 per month, but the practice pays $15,000 per month to their own real estate LLC at above market value. The extra $5k in rent is still being partly covered by the OP who isn't reaping the benefit on the back side of the real estate LLC. Why should OP pay to cover that excess?

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                • #9
                  lol, when you used the word "above", I thought you were referring to the FMV that had been discussed "above", not "above-FMV" rent. Eats, shoots and leaves, iow.
                  Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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                  • #10
                    Originally posted by jfoxcpacfp View Post
                    The main consideration when buying real estate is, of course, to invest wisely. I'm typically in favor of a physician owning (and controlling the use of) the property where the practice is located. Not necessarily so with a group of physicians. I would be very hesitant to invest in a partnership-owned RE entity that does not pay FMV rent.

                    Tax implications of the lease agreement are the same no matter who leases the property.

                    A small advantage of RE is that rent payments are not subject to FICA taxes.

                    Never put RE into a corporation.

                    Yes, a partnership can require you to do anything it wants (legal) for you to be admitted.

                    Not enough understanding of the nuances of Stark to comment.

                    You really to analyze that on a local level (income tax returns, lease agreements, inc stmt/bal sheet, GL), preferably with an experienced CPA.

                    when you say never put RE in corporation, an LLC is still okay, correct?

                    is it illegal for a practice to pay it’s own real estate LLC above FMV?

                    Comment


                    • #11
                      Originally posted by GastroMastro View Post


                      when you say never put RE in corporation, an LLC is still okay, correct?

                      is it illegal for a practice to pay it’s own real estate LLC above FMV?
                      • Yes, an LLC is appropriate and/or a reasonable amount of umbrella insurance.
                      • It’s not illegal but the exces could be disallowed in the event of audit. Highly unlikely unless extremely overvalued and the chance of audit is also extremely low
                      Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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                      • #12
                        Thanks for the info guys, they made it optional, so I will go over all the finances before making a decision.

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