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1. Your Building Losses Become Usable Immediately
Without grouping, losses from your building LLC are classified as passive under the self-rental rules. Passive losses cannot offset your W2 or K-1 income from the dental practice — they get suspended in a carry-forward account until your building generates taxable profit. With grouping, those losses become non-passive and can be applied directly against practice income in the year they are generated.
2. Cost Segregation Becomes More Powerful
A cost segregation study can generate $200,000, $300,000, or more in first-year bonus depreciation losses from a single building purchase. Without grouping, that loss is frozen. With grouping, it flows directly to reduce your W2 and K-1 income. The combination of a cost segregation study and the grouping election in year one of building ownership is the scenario where this strategy produces its maximum impact.
3. It Fixes the Asymmetry Permanently
The self-rental rule creates an asymmetry that is uniquely unfavorable: income in the building LLC is non-passive and taxable, while losses are passive and trapped. The grouping election resolves this by making losses non-passive as well. Both sides of the ledger now match, and the losses can offset the income within the grouped unit — including your S corporation W2 and K-1.
4. Simpler Participation Testing
Without grouping, the building LLC and the practice are tested separately for material participation — adding complexity to your tax return and increasing the risk of unintentional passive characterization. With grouping, both activities share a single material participation test. As an operating dentist working full-time in your practice, you clearly satisfy it.
5. No Suspended Loss Ledger to Manage
Tracking suspended passive losses from year to year — how much has accumulated, how much has been released, how much carries forward — is time-consuming and easy to get wrong. When you group and your practice income is sufficient to fully absorb building losses each year, there is nothing to track. The deduction simply flows through and is gone.
1. It Is Binding
This is the most important risk: the grouping election is permanent unless there is a material change in your facts and circumstances. You cannot decide in year three that it was a mistake and ungroup. If your situation changes — income drops, you bring on a partner, you plan a DSO sale — you are locked in until one of those changes forces a decoupling. Think through the long-term picture before making this election, not just the year-one tax savings.
2. Partial Sales Become Complicated
If you sell the building but keep the practice, the grouped activity is not fully disposed of. Suspended losses — if any remain — may stay trapped. The tax treatment of gains and losses on a partial sale within a grouped unit is significantly more complex than in an ungrouped scenario and requires careful planning with a CPA who understands passive activity rules in depth.
3. You Forfeit the Passive Shelter
Before grouping, losses in your building LLC are passive. That means they can offset passive income from other sources — a duplex you rent out, an apartment building, a commercial property. Once you group, building losses become non-passive and can no longer shelter that outside passive income. For dentists with a growing real estate portfolio, this forfeiture can be costly.
4. DSO Sales and Partner Transitions Break the Grouping
Selling any equity in the practice to a DSO, or bringing on a partner who does not own the building at the same ownership percentage, violates the common ownership requirement and forces an unplanned ungrouping. This happens at the least convenient time — typically when the practice is already undergoing a complex transaction — and adds an unexpected layer of tax complexity.
5. 1031 Exchanges Become More Complex
A 1031 like-kind exchange allows you to sell a rental property and defer capital gains by rolling proceeds into a new property. It is designed for passive investment real estate. When you group your building with an active business, the building takes on more of the character of an operating business asset. This does not automatically disqualify a 1031, but it creates significant complications that must be worked through with your CPA and a qualified intermediary before executing the exchange.
6. The Semi-Retirement Trap
The grouping election is valuable when practice income is high. When you slow down — going from $700,000 in K-1 income to $80,000 — the non-passive losses from the building no longer have much income to absorb, and the non-passive income from the building can no longer be sheltered by outside passive losses. You are left in a characterization that no longer benefits you but that you cannot easily exit. If your practice wind-down is within a 5-10 year horizon, factor that into the decision before electing.
Wes's recommended framework: make the election if you are buying a building with a long-term operating horizon, want to harvest cost segregation deductions immediately, and have no near-term plans to sell, partner, or transition ownership of either entity. Skip it or defer the decision if your income is currently low, you own significant passive real estate, or a DSO or partner transaction is on the table within the next few years.
This is not a decision to make based on the year-one tax savings alone. Model it forward with your CPA across 5 to 10 years. The election that looks optimal in year one can be constraining by year five.
Listen to Episode 153 of The Dental Boardroom Podcast: https://podcasts.apple.com/us/podcast/153-cost-segregation-tax-strategy-for-dentists-part-5/id1518344747?i=1000762915692
Wes knows what's best for dental practices. He's been doing this for a long time and he sees lots of practices. He can tell me how our practice is doing, and what we can do to increase our productivity. With past CPA's, there were no ideas. It was all coming from me, saying "I think I can do better, but I don't know how." I come in to meet with Wes and he says "You CAN do better, and I know how."
PracticeCFO is in hundreds of dental offices around the country. They know what numbers should look like. They know what percentages of payroll, rent and supplies should be, and they will hold you accountable to those numbers, which will really help you stick to your plan and your path of growth and savings. That is invaluable
Whenever something comes up, whether it's building or practice related and we weren't sure where the numbers would go, PracticeCFO has been instrumental in helping us figure that out. I can't say enough of how important that is - that it goes beyond that initial partnership. They make sure this business marriage works.
When I go home from work, I don't spend a whole lot of time stressing about what my books look like, or how much I owe in taxes. By using PracticeCFO, the burden of keeping track of a lot of the big financial numbers and metrics are taken off my plate.
PracticeCFO helped me develop a plan for the future. I have colleagues that work with other accountants that don't have a plan - they just look at the numbers of the practice and that's it. There's no plan for 10, 20 years from now. But with PracticeCFO, you get that. PracticeCFO makes you feel like you're they're only client.
(In reference to his practice sale) What could've been super stressful, wasn't! When picking John and Wes, it was from word of mouth recommendations and other people's experiences from the past that really did it for me. And it turns out that those recommendations were right on the line.
Wes knows the business side of dentistry. His comprehensive plan will organize your personal and professional finances so you can focus on taking care of patients. Massive ROI.
I can’t say enough good things about everyone at PracticeCFO. Everyone on the team is professional, organized, knowledgeable, helpful and kind. They also respond to emails and phone calls immediately and are always happy to help. They have helped me navigate year-to-year as a business owner. PracticeCFO gives me peace of mind that my business is in good hands.
I love Practice CFO! They have helped me obtain a practice and maintain a practice. They are incredible people who are on top of everything and make owning and running the business portion of a practice easy. They couldn’t be better for my business and my sanity. They have every detail of the business and taxes taken care of where all I have to do is show up and follow their easy steps to success!
Practice CFO has the best tools I’ve seen for personal tax and financial planning in addition to top-tier corporate tax and accounting services. I have been very pleased with the level of quality service. They manage my monthly bookkeeping and accounts payable. It is a great system and saves me a ton of time, and it allows us to have monthly financial statements within a week of month end.
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