Tax Rules on Property Purchases Thinking of Buying Space for your Practice? Take Note of Significant Tax Exemptions.

1. the legal issue — tax rules: property purchase
Thinking of Buying Space for your Practice?
Take Note of Significant Tax Exemptions.
Tracy Altemus, CCIM
Zandra O’Keefe, CPA
Should I lease, buy or build to suit? That is a question that many physicians consider. The idea of making
payments to a facility you own as opposed to paying rent to a landlord can certainly be an attractive option for
some that have the financial wherewithal. That said, it tends to make sense if the payments you are making and
your related tenant improvement investment are equivalent or less than what you would pay leasing from someone else and
- even more importantly - that you have an exit strategy (e.g., future sales potential with appreciation in value as an added
bonus). There are many factors to consider when making the decision to lease or own. An attorney, accountant, banker and
real estate broker can prove invaluable in helping you gather the information needed to help you evaluate options.
Lease?
Buy? ???? Build?
38 • Round-up • August 2014 • A monthly publication of the MCMS

2. the legal issue — tax rules: property purchase
If you do decide to own, we recommended that your
operating entity (i.e., medical practice), sign a lease with
your building related ownership entity, and charge fair mar-ket
value rent (consider compliance with STARK law reg-ulations,
if applicable),1 even if both entities have common
ownership. One benefit of this structure is that the operat-ing
entity generally can deduct the rent as a business
expense. The ownership entity records rent as income,
deducts depreciation and pays the loan payment, if applica-ble,
and any net income can be distributed to the owner(s)
after operating capital retention needs are met. Typically,
either party can pay the deductible operating expenses, but
the responsible party should be specifically identified in the
lease. Selecting the appropriate entity is also important; an
LLC or partnership is often the entity of choice.2,3
Another recent tax benefit you may be able to take
advantage of: if you lease an office where a related person
or company owns at least 80% of the landlord entity, you
may be eligible for a transaction privilege sales tax exemp-tion
on commercial lease rent.4 This applies throughout
Arizona, and several cities subscribe to this exemption, as
well. It can save you between 2% - 3% of your rent, which
can translate to thousands of dollars per year.
If you own a commercial building, you will need to
understand and comply with the new IRS tangible property
regulations taking effect in 2014; the time to plan is now.
Consider engaging an expert to: optimize depreciation
deductions, perform a cost segregation study and tactically
plan to avoid potential dry income effects to owners.5 Dry
income results when an owner is allocated taxable income
without a corresponding cash distribution. Unintended
income allocations can result over time when partners are
entering and exiting the partnership, depreciation deduc-tions
are allocated up front and debt remains to be paid in
the future. Partners who remain invested can incur dry
income without proper ongoing management.
Remember also to consult a real estate insurance and
valuation expert to help you determine the coverage that
best suits your needs. The policy should be based on an
accurate replacement value, which is updated at least every
other year and when values substantially change. A CPA
firm can provide you with integrated tax, insurance and
other professional advisory services to provide seemless
advice in helping you make the best decision.6,7
Each situation is different. Talk with experts to help
you strategize the optimal structure for your particular situ-ation;
answer questions about the sales tax exemption or to
discuss your commercial real estate needs.
ru
Tracy Altemus is Executive
Vice President, Healthcare
Brokerage Services at
Ensemble Real Estate
Solutions, a preferred partner
with MCMS.
Tracy is involved in leasing,
sales and development of
healthcare facilities. She
assists her clients with everything from leasing space,
acquisition and sales to providing real estate consulting
services. Email her at taltemus@ensemblere.com.
Zandra O’Keefe is a
Managing Director for CBIZ
and shareholder of Mayer
Hoffman McCann, PC. She
provides accounting, tax plan-ning
and compliance services
as well as extensive business
management consulting to a
diverse group of closely held
businesses, their owners and high net worth individuals
for the Phoenix office tax division. Contact her at
zokeefe@cbiz.com.
1. http://starklaw.org/investment.htm
2. http://www.cbiz.com/page.asp?pid=8632
3. http://www.cbiz.com/page.asp?pid=9606
4. http://www.azdor.gov/News/tabid/74/newsid530/457/House-Bill-
2324Commercial-Lease-Exemption/Default.aspx
5. http://www.cbiz.com/page.asp?pid=11126
6. http://www.cbiz.com/page.asp?pid=10938
7. http://www.cbiz-onesource.com/valuationgroup/page.asp?pid=1368
Copyright © 2014, CBIZ, Inc. All Rights Reserved. To ensure compli-ance
with requirements imposed by the IRS, we inform you that unless
specifically indicated otherwise, any tax advice in this communication
is not written with the intent that it be used, and in fact it cannot be
used, to avoid penalties under the Internal Revenue Code, or to pro-mote,
market, or recommend to another person any tax related matter.
A monthly publication of the MCMS • August 2014 • Round-up • 39