Physician with real estate

[jiggabot]

Can a physician use his gross income to buy real estate that is not necessarily related to his practice, to minimize his taxable income?

For example: a solo family doctor makes $300k a year in gross collections. He uses $200k to buy another office building. He rents out that building to another family doctor for $20k a year. Assuming he has no other overhead, does this mean he only pays taxes on $100k+$20k per year?

What if he rents his building out to a chiropractor instead, does that change whether or not he can avoid paying taxes on that $200k for the building? What if the other person renting out the building were completely unrelated to the medical field?

The assumptions obviously won't be like this in real life, I am just specifically trying to understand what can be deducted from taxable income.

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[TexasPhysician]

Doesn't work like that. There are many tax loopholes, so you will either need to hire a good accountant or start researching tax law.

 

[touchadream]

Can a physician use his gross income to buy real estate that is not necessarily related to his practice, to minimize his taxable income?

For example: a solo family doctor makes $300k a year in gross collections. He uses $200k to buy another office building. He rents out that building to another family doctor for $20k a year. Assuming he has no other overhead, does this mean he only pays taxes on $100k+$20k per year?

What if he rents his building out to a chiropractor instead, does that change whether or not he can avoid paying taxes on that $200k for the building? What if the other person renting out the building were completely unrelated to the medical field?

The assumptions obviously won't be like this in real life, I am just specifically trying to understand what can be deducted from taxable income.

Texas gives you good advice.

Real estate is a trap for most physicians most years. In the booms that have occurred many have made money, but its a long hold, a lot of trouble and not a good tax technique due to depreciation recapture on sale. This means you have to take back into ordinary income the depreciation deductions you took over time, so the only thing you can do is "swap til you drop" (die) since your heirs will get the property at fair market value, not the depreciated basis you have created. Bum deal, unless you are a pro, and a lot of those are bankrupt this year, after hanging on barely, last year.

You need: a 401k combined with a defined benefit plan, large (up to around 200K per year) deductible up front retirement savings, then a Section 79 Plan, a life insurance technique that operates like a Roth for people who make too much to have a Roth. Now you have some retirement that is going to be taxed on back end, and some that won't. Both vehicles can use life insurance, so the PREMIUMS are deductible for you, not just the growth and proceeds, as most agents tout.

Next, if you have more you can save, you can create and use a captive insurance company, of your own, or a cell captive which keeps your money separate from other docs in the captive. This is perhaps the best kept tax secret doctors should know about. It can generate huge deductions in some cases ($300k up to $1.2M PER YEAR), and you get to keep the money inside your C corporation captive. You will know this is legit if you go to IRS.gov and search for 1120 Captive, which is the corporate tax form for these. You will be using an 831b captive (IRC section). There are many other small deductions available to you which don't involve any risk, such as Health SAvings Accounts, $5600 or so per year, and some other corporate executive benefits.

You are in a high income profession and should make every effort to leverage your time comfortably to practice medicine or surgery as efficiently as you can. There are many ways to do this. I know of FPs who are grossing over a million a year, and they could do better. Check out the white papers on DIGMAs, for example, by searching on Google scholar.

Good luck!

 

[touchadream]

Doesn't work like that. There are many tax loopholes, so you will either need to hire a good accountant or start researching tax law.

I don't have time to keep up with tax law for doctors, although I do it full time, have law and master of laws degrees in tax: accountants, good ones, are indispensable, but they know a lot we don't (auditing is huge part of their curriculum) and they don't have nearly the training in tax law, although over time they learn a lot, depending, totally depending, on the scope of their practice. And they don't have the preceding law degree, which explains life in ways nothing else can. The Internal REvenue Code, not including the regulations weighs about 9 lbs. The tax attorneys/pension attorneys (not to mention actuaries) with the knowledge you need typically are in larger corporations tax departments, with accountants on the same floor. (I've worked there.)

The "loopholes" you describe, yes, do some research, but don't think you are going to get the meat out yourself, especially if you practice medicine and have any other life at all. As I am married to a doc and have plenty of them in the immediate family, I know you are smart and COULD have done what I do for a profession, but you guys need to remember just because you could have done tax law, you DIDN'T! Underestimating good advisors is a common physician error in the real world, as is relying on the wrong ones for "help." Accountants tend to be "historians," telling you what you owe after what you did. They do minimal planning, that is done by sophisticated financial professionals, who have the staffs of huge companies, who have the tax and pension lawyers to literally live for the updates from the IRS. They know when REgs are coming out , listen to the nuanced speeches of the powers at the IRS and Labor Dept. in painstaking detail. Bloomberg has front cover this month: "HOW TO PAY NO TAXES, and it just includes a brief and uniformative paragraph about executive benefits and insurance companies, which glosses over most of what I know how to do for doctors...seriously, do you know about 831b captives? Let's hope the current administration doesn't either, because they are awesome for late earners of high income, and you know who you are, when those rates hit your household. Then you have to figure out which firms to use, and when, for all your financial issues..I'm just saying its not that easy.

You have correctly seen through the real estate problem for doctors. I have seen some choice building deals and you have the rare insight to identify who always gets taken, to a greater or lesser extent. Don't know if you are in the old Go Zone there in Texas, but a lot of fine doctors got handed some bad tax results on those accelerated depreciation "opportunities." Can't net passive losses against med income anyway.

 

[dynx]

Can a physician use his gross income to buy real estate that is not necessarily related to his practice, to minimize his taxable income?

For example: a solo family doctor makes $300k a year in gross collections. He uses $200k to buy another office building. He rents out that building to another family doctor for $20k a year. Assuming he has no other overhead, does this mean he only pays taxes on $100k+$20k per year?

What if he rents his building out to a chiropractor instead, does that change whether or not he can avoid paying taxes on that $200k for the building? What if the other person renting out the building were completely unrelated to the medical field?

The assumptions obviously won't be like this in real life, I am just specifically trying to understand what can be deducted from taxable income.

well above are partly correct.

What you can do and should do is incorporate. Your corporation can buy property and write it off and pay you the left over income as salary which would be taxed. You can also get access to better retirement plans than a 401k which is what touchadream is describing.

There are advantages to property inclucing 1031 exchanges which avoids the claw back from depreciation when you're ready to move on from one area to the next. In addition you can pay youself (your corporation) rent for your building that it owns and write that off your personal taxes. things get dicey as you get more advanced and you teeter on the edge of legal but get a real good accountant and you can save a ton of money...do not even dream of doing this stuff yourself.

 

[jiggabot]

Texas gives you good advice.

Real estate is a trap for most physicians most years. In the booms that have occurred many have made money, but its a long hold, a lot of trouble and not a good tax technique due to depreciation recapture on sale. This means you have to take back into ordinary income the depreciation deductions you took over time, so the only thing you can do is "swap til you drop" (die) since your heirs will get the property at fair market value, not the depreciated basis you have created. Bum deal, unless you are a pro, and a lot of those are bankrupt this year, after hanging on barely, last year.

You need: a 401k combined with a defined benefit plan, large (up to around 200K per year) deductible up front retirement savings, then a Section 79 Plan, a life insurance technique that operates like a Roth for people who make too much to have a Roth. Now you have some retirement that is going to be taxed on back end, and some that won't. Both vehicles can use life insurance, so the PREMIUMS are deductible for you, not just the growth and proceeds, as most agents tout.

Next, if you have more you can save, you can create and use a captive insurance company, of your own, or a cell captive which keeps your money separate from other docs in the captive. This is perhaps the best kept tax secret doctors should know about. It can generate huge deductions in some cases ($300k up to $1.2M PER YEAR), and you get to keep the money inside your C corporation captive. You will know this is legit if you go to IRS.gov and search for 1120 Captive, which is the corporate tax form for these. You will be using an 831b captive (IRC section). There are many other small deductions available to you which don't involve any risk, such as Health SAvings Accounts, $5600 or so per year, and some other corporate executive benefits.

You are in a high income profession and should make every effort to leverage your time comfortably to practice medicine or surgery as efficiently as you can. There are many ways to do this. I know of FPs who are grossing over a million a year, and they could do better. Check out the white papers on DIGMAs, for example, by searching on Google scholar.

Good luck!

Thanks for the reply.
1. I don't think the depreciation recapture on sale applies to anyone with a net income over $150k, since they do not get annual depreciation deductions, right?

2. Does the defined benefits plan still allow you to put away $200k if you are only 28 years old? I thought at my age, you can only put away $40k a year or so.

3. I don't quite understand what a captive insurance company or any life insurance for that matter means. Can I invest my life insurance money into real estate as easy as if it were just cash?

Finally, it seems like all of this is only feasible if you are in a private group or solo. What if the physician were employed by a hospital?