Cost Segregation for Medical and Dental Practice Owners: 21%+ in 5-Year Property

Medical and dental buildings reclassify materially higher than typical commercial — IRS ATG Ch. 7.5 supports a 21% 5-year personal property baseline. The worked $1.5M practice example, OBBBA 100% bonus, and the §1245 recapture if you sell.

Most cost segregation content speaks to commercial real estate generally — office buildings, warehouses, multifamily. Medical and dental practice owners get lumped in with "other commercial" and quoted a generic 10–15% reclassification range. That number is wrong for a practice building. It's wrong because medical and dental buildings carry an unusual concentration of specialized personal property: dental casework, gas plumbing, vacuum lines, exam-room electrical, decorative lighting designed to manage patient anxiety. The IRS Cost Segregation Audit Techniques Guide devotes an entire chapter to healthcare facilities (Chapter 7.5) precisely because the reclassification math is different here.

Engineering firms know this. They target medical and dental practice owners aggressively because a 21%+ 5-year reclassification on a $1.5M building generates the kind of first-year deduction that produces a referral pipeline. What they generally do not publish, in the lead magnets and intake calls, is the back-end §1245 recapture trade-off when a doctor sells the building to a younger associate at retirement — which is the most common exit path for practice real estate. This article walks through both halves of the equation.

TaxProtestTx provides a free feasibility estimator for medical and dental property at /cost-seg/?property_use=medical-dental. The numbers below come from the same engine.

Why medical and dental buildings reclassify higher than typical commercial

A vanilla long-term residential rental tends to land near 20–25% reclassification. A typical commercial office building lands around 10–15%. A medical or dental practice building lands materially higher — the IRS ATG Ch. 7.5 (Healthcare Industry) walks through why.

The driver is build-out density. A standard office tenant needs power, HVAC, light fixtures, and partition walls. A dental operatory needs all of that plus: dedicated electrical for chair-mounted equipment, plumbing for spittoon drains and water lines to each chair, compressed air lines, dental vacuum (high-volume evacuation), nitrous oxide and oxygen gas piping, dedicated waste lines for amalgam separators, and casework engineered around chair geometry. A medical exam room needs blood pressure cuff mounts, sharps disposal integration, casework with sealed surfaces, and exam-table-grade electrical. A radiology room needs lead shielding integrated into the wall assembly.

Most of those components are §1245 personal property under the Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997) framework — they are tangible property whose primary function relates to operating the practice rather than housing the practice. The seminal case held that medical-facility components serving the operation of medical equipment (rather than the building itself) are §1245 property eligible for accelerated depreciation. That ruling is the legal spine under every healthcare cost-seg analysis since.

The TaxProtestTx engine uses a 21% / 2% / 8% baseline for medical and dental property — 21% 5-year, 2% 7-year, 8% 15-year. That baseline reflects the ATG Ch. 7.5 healthcare profile, not generic commercial.

What qualifies as 5-year property in a practice building

The 5-year bucket under IRC §168 and Rev. Proc. 87-56 (asset class 57.0 for retail/service trade) captures personal property and equipment with a class life of 4–10 years. Inside a medical or dental practice, the 5-year bucket typically includes:

• Dental casework: chair-side cabinetry, sterilization-area millwork, reception built-ins where they function as movable furniture rather than structural.
• Specialized plumbing: dedicated water lines to each chair, vacuum lines, compressed air lines, dental amalgam separator plumbing.
• Medical gas piping: nitrous oxide, oxygen, and medical air piping serving operatories.
• Exam-room electrical: dedicated circuits for chair-mounted equipment, isolated grounding for sensitive diagnostic equipment, low-voltage data runs serving practice management systems.
• Decorative lighting: pendant fixtures over reception desks, accent lighting in waiting areas, decorative sconces — fixtures whose primary function is aesthetic rather than illumination of the building shell.
• Window treatments, wall coverings, and decorative finishes that are removable without structural damage.
• Practice-specific signage mounted to the building.

The 7-year bucket (asset class 57.0 office equipment) typically captures items like dental chairs, x-ray equipment, sterilization equipment — but those are usually purchased as equipment outside the building basis, so the 7-year bucket inside a real estate cost-seg tends to be modest (the engine uses 2%).

The 15-year bucket (qualified improvement property, land improvements) captures site work — parking lot, landscaping, exterior lighting, sidewalks, monument signs. The engine uses 8% as a baseline; an actual building with substantial parking and landscaping can run higher.

The remaining 72% sits in the 39-year nonresidential real property bucket — the building shell, the structural HVAC, the roof, structural plumbing, structural electrical, and the slab.

The 39-year commercial building treatment vs. 27.5-year residential

A practice owner coming from a residential rental background often expects 27.5-year depreciation. That is wrong for a practice building. IRC §168(c) sets nonresidential real property at 39 years, straight-line, mid-month convention. Residential rental property gets 27.5 years only when the building is a "dwelling unit" under §168(e)(2)(A) — meaning it generates rental income from individuals using it as a residence. A medical or dental office is nonresidential by definition.

The 11.5-year gap matters. On a $1M depreciable basis, 27.5-year straight-line produces ~$36,000/year of cost-recovery deduction. 39-year straight-line produces ~$25,600/year. Without cost-seg, the practice owner's annual deduction runs about 30% lower than what a residential investor would get on the same basis. That gap is exactly why the cost-seg conversation matters more for practice owners than for residential landlords — they are starting from a worse baseline.

100% bonus depreciation interaction under OBBBA

The One Big Beautiful Bill Act §70301 (Pub. L. 119-21, July 2025) restored IRC §168(k) bonus depreciation to 100% for qualifying property acquired and placed in service after January 19, 2025. Reclassified 5-year, 7-year, and 15-year property qualifies. The 39-year building shell does not.

The practical effect for a practice owner: every dollar pulled out of the 39-year bucket and into 5/7/15-year buckets becomes immediately deductible in year one. Without bonus, the 5-year bucket would deduct over five years using the 200% declining-balance method, with a half-year convention — a slower curve than year-one expensing.

For a 2026 practice acquisition, the timing is favorable. A doctor closing on a building in 2026 can reasonably plan around 100% bonus on the reclassified portion, subject to the placed-in-service rules and the rest of §168(k). For deeper treatment of the OBBBA mechanics, see /cost-seg/articles/obbba-bonus-depreciation-2026.

Practice-acquisition vs. ground-up build scenarios

Two common scenarios produce very different cost-seg profiles.

Scenario A — Practice acquisition (most common). A doctor buys an existing practice. The transaction includes goodwill, equipment, accounts receivable, the patient list, and (sometimes) the underlying real estate. Only the real estate component generates a cost-seg conversation. Goodwill is §197 intangible property, 15-year amortization, no cost-seg. Equipment is already on a 5-year or 7-year schedule via the seller's depreciation history (or a §338(h)(10)/§336(e) election rebases it).

For real-estate-component cost-seg in an acquisition, the doctor's depreciable basis is the purchase price allocated to the building (purchase price minus land minus equipment minus goodwill). The engine's 21%/2%/8% baseline applies to that depreciable basis.

Scenario B — Ground-up build. A doctor builds a new practice building. Depreciable basis includes hard costs, soft costs (architect, permits, construction interest capitalized under §263A), and site improvements. Ground-up builds tend to reclassify slightly higher than acquisitions because the construction invoices break out trade-by-trade detail that a cost-seg analysis can map directly to asset categories. An acquisition relies on engineering reconstruction from drawings and observation.

The engine's baseline is calibrated to acquisitions. Ground-up builds may run 1–3 percentage points higher in 5-year property; the practice owner's CPA and cost-seg engineer can refine the allocation against actual construction documentation.

Worked example — $1.5M practice, 21% reclassification

A dentist purchases a practice building in 2026 for $1.5M. Land is appraised at $300,000. Depreciable basis is $1.2M. The dentist holds in a single-member LLC taxed as a sole proprietorship, files Schedule E for the rental to the practice, and is in the 37% federal marginal bracket.

Using the medical-dental baseline allocation:

| Bucket | Allocation | Amount | |---|---|---| | 5-year personal property | 21% | $252,000 | | 7-year property | 2% | $24,000 | | 15-year land improvements | 8% | $96,000 | | Total accelerable | 31% | $372,000 | | 39-year building shell | 69% | $828,000 |

Under 100% bonus depreciation (IRC §168(k) post-OBBBA), the entire $372,000 accelerable bucket is deductible in 2026. The 39-year building shell on $828,000 generates approximately $11,000 of mid-month straight-line depreciation in year one.

Estimated year-one depreciation: ~$383,000.

At a 37% federal marginal bracket: estimated ~$142,000 year-one federal tax effect. State tax effect varies; Texas has no individual income tax, so a Texas-resident dentist would not see a state-level benefit on the personal return. Results are not guaranteed and depend on the practice owner's specific facts, the actual cost segregation engineering, passive activity loss limitations under IRC §469, and basis limitations under §704(d)/§1366(d).

Run the same numbers with your own purchase price at /cost-seg/?property_use=medical-dental&purchase_year=2026.

The trade-off — §1245 recapture if you sell to a younger doctor

Practice real estate has an unusual exit pattern. Doctors retire, and they often sell the building to a younger associate or to the buyer of the practice itself. That sale triggers §1245 recapture.

IRC §1245(a)(1) recharacterizes accumulated depreciation on §1245 property as ordinary income on disposition, up to the lesser of accumulated depreciation or gain realized. The reclassified 5-year, 7-year, and 15-year buckets from a cost segregation analysis are §1245 property under Hospital Corp. of America. The 39-year building shell is §1250 property — different recapture regime, generally taxed at the 25% unrecaptured §1250 rate rather than ordinary rates.

The math: a dentist who took $372,000 of accelerated deductions in 2026 and sells the building in 2031 for a $200,000 gain over adjusted basis will see most of that gain recharacterized as ordinary income (capped at the gain), taxed at the dentist's marginal bracket — potentially 37% rather than the 20% long-term capital gain rate. The cost-seg deduction is not erased, but the rate arbitrage between accelerated depreciation at 37% and recapture at 37% is zero. The benefit reduces to the time value of money on the deferral.

For a long hold (10+ years), the time-value-of-money benefit is meaningful. For a short hold, it can disappear entirely. See /cost-seg/articles/cost-segregation-recapture-1245-trap for the full mechanics. A practice owner planning to hold 5+ years through retirement can model the long-hold scenario at /cost-seg/?property_use=medical-dental&purchase_year=2026&planned_disposition=5plus.

§1031 exchange interaction for mid-career practitioners

A subset of practice owners reach mid-career, sell the original building, and roll the proceeds into a larger or differently-located practice building via a §1031 like-kind exchange. IRC §1031(a)(1) defers gain recognition on real property exchanged for like-kind real property held for use in a trade or business or for investment.

The §1031 mechanics interact with cost segregation in two important ways.

First, the §1245 recapture portion of a sale is not eligible for full §1031 deferral if the replacement property has insufficient §1245 property to absorb it. The recapture rules require the replacement property to carry forward enough §1245 basis to "soak up" the deferred recapture; otherwise the recapture portion is recognized currently. Practitioners trading from a small practice building (light §1245 buckets) into a larger practice building (heavier §1245 buckets) are usually fine. Practitioners trading from a heavily cost-segregated building into a §1245-light replacement can trip on this rule.

Second, the carryover basis from the relinquished property follows the practitioner into the replacement property at a depressed level. The cost-seg accelerated deductions reduced the relinquished property's basis; that reduced basis carries over. A fresh cost-seg analysis on the replacement property applies only to the boot (additional cash basis above the carryover), not to the full purchase price.

For deeper treatment of how §1031 carryover basis affects post-exchange cost-seg, see /cost-seg/articles/cost-segregation-1031-exchange-carryover-basis.

The PLLC / S-corp ownership structure question

Practice real estate is rarely owned inside the same legal entity that operates the practice. The standard structure: the practice operates as a PLLC or PC (state-mandated for licensed professionals) taxed as an S-corporation, and the real estate sits in a separate single-member LLC owned by the practitioner personally, leased back to the practice at fair market rent.

This structure matters for cost-seg in several ways.

Self-rental rules under §469. Rental income from real property leased to a trade or business in which the owner materially participates is recharacterized as nonpassive under Treas. Reg. §1.469-2(f)(6). This is generally good for cost-seg — it lets the year-one bonus depreciation deduction offset the practice's nonpassive income, rather than getting trapped as a suspended passive activity loss.

Basis limitations. Cost-seg deductions reduce the LLC owner's basis in the LLC under §704(d). The basis must support the deduction. For a single-member LLC owning a building purchased with a mortgage, the basis includes the mortgage under the at-risk rules of §465 (subject to qualified nonrecourse financing rules for real estate).

Reasonable rent. The lease from the real-estate LLC to the practice S-corp must be at fair market rent. Below-market rent invites IRS scrutiny and can shift the cost-seg deduction in unhelpful ways. Above-market rent shifts taxable income from the S-corp (where it might be subject to reasonable-compensation analysis) to the rental LLC (where it is not subject to self-employment tax) — which is good for the practitioner, but only within FMV bounds.

A practice owner's CPA and attorney generally need to weigh in on the entity structure before any cost-seg analysis runs. The structure dictates which return reports the deduction and which character the income carries on exit.

Run an estimate

The TaxProtestTx feasibility estimator runs the medical-dental allocation against any purchase price, year, and bracket. It cites the IRS ATG Ch. 7.5 healthcare baseline and shows the year-one tax effect under current OBBBA rules.

Run a medical or dental practice estimate →

The estimator is not a cost segregation study under Treasury Circular 230 and cannot be relied on as tax advice. It is a screening tool. A practice owner whose estimate looks favorable should engage a qualified CPA and cost segregation engineer before filing — typically a fixed-fee study runs $5,000–$15,000 for a practice building, and the engineer's report is the document that supports the deduction under audit.

See the calculator without preset inputs →

Sources

• IRS Cost Segregation Audit Techniques Guide, Ch. 7.5 — Healthcare Industry. https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-7-5-healthcare
• IRC §168(c) — Recovery period for nonresidential real property (39 years).
• IRC §168(e)(2)(A) — Definition of residential rental property.
• IRC §168(k) — Bonus depreciation, restored to 100% by One Big Beautiful Bill Act §70301, Pub. L. 119-21 (July 2025).
• IRC §1245(a)(1) — Recapture of depreciation on §1245 property.
• IRC §1031(a)(1) — Like-kind exchanges of real property.
• IRC §469 — Passive activity losses; Treas. Reg. §1.469-2(f)(6) self-rental rule.
• IRC §704(d), §1366(d), §465 — Basis and at-risk limitations.
• IRC §263A — Capitalization of construction-period interest.
• Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997) — Seminal case on §1245 personal property in medical facilities.
• Whiteco Industries v. Commissioner, 65 T.C. 664 (1975) — Six-factor permanence test.
• IRS Publication 946 — How to Depreciate Property.
• Rev. Proc. 87-56 — Class lives and recovery periods.

Disclaimer

Disclaimer. This article describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.