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You bought a building. You commissioned a cost segregation study. You generated a $300,000 loss in year one from bonus depreciation. And then your CPA told you that you cannot use it to reduce your W2 or K-1 income from the dental practice.
If that has happened to you, or if you want to understand why it happens before it does, Episode 153 of The Dental Boardroom is the episode to listen to. Wes Read breaks down the self-rental asymmetry — the tax rule that traps building losses for dentists — and explains the one election that resolves it permanently.
Under IRS passive activity rules, rental income is generally classified as passive. That matters because passive losses can only offset passive income — they cannot reduce active earned income like a W2 salary or a K-1 distribution from an S corporation.
There is an exception, however, for self-rentals. When you rent a building to a business you also own and operate — which is exactly the situation for most dentists who own their building — the IRS reclassifies that rental income from passive to non-passive. The intent is to prevent dentists from engineering artificial passive losses to shelter other income.
The problem is that the reclassification is one-sided. Rental income in a self-rental becomes non-passive. But rental losses stay passive. This creates an asymmetry with real financial consequences:
● Income in your building LLC: non-passive — taxable against your other income
● Losses in your building LLC: passive — cannot offset your W2 or K-1
The result is that a large year-one cost segregation loss gets suspended. It sits in a carry-forward account and can only be released against future building income or passive income from other rental properties. For a dentist whose only real estate is their dental office building, the loss is effectively frozen — sometimes for years.
IRC Section 1.469-4(f) offers a solution: the grouping election. A dentist can elect to treat their building LLC and their dental practice S corporation as a single economic unit for tax purposes. When they do, the two activities are no longer evaluated separately. Gains and losses flow between them as if they were one entity.
The practical effect is that building losses change character. They become non-passive — the same classification as W2 wages and K-1 distributions from the dental practice. And non-passive losses can offset non-passive income.
That $300,000 suspended loss is now a $300,000 deduction against practice income. At a combined federal and state marginal rate of 40 to 47 percent for a high-income dentist, that is $120,000 to $140,000 in actual tax savings — in a single year.
The IRS requires four conditions for two activities to be grouped: common ownership, common control, geographic proximity, and economic interdependence. A dentist who owns both the practice and the building at the same percentage, operates the practice inside the building, and is the only tenant satisfies every condition. It is one of the clearest qualifying scenarios in the tax code.
The grouping election must be made on the original tax return for the first year the building is placed in service. It cannot be made retroactively. If you bought your building in 2025 and your 2025 return is filed without the election, that window is permanently closed for that building.
The mechanics are straightforward: your CPA attaches a disclosure statement to your return identifying the building LLC and the practice S corporation as grouped activities, alongside Form 8582. The election is then binding in all subsequent years unless there is a material change in the facts — such as selling the practice, bringing on a partner, or restructuring ownership.
The grouping election works best when the dentist is already generating high taxable income in the practice and has significant building losses to deploy. The best-case scenario Wes describes: a dentist who bought a practice five or more years ago without a building, grew into the top tax brackets, and is now buying their building for the first time. Commission the cost segregation study, make the grouping election, and use the first-year bonus depreciation loss to directly offset peak practice income. The savings in year one alone can be substantial.
The election is less useful when practice income is low, when other real estate properties exist with their own passive income dynamics, or when a DSO transaction or partnership is on the near-term horizon. In those cases, the cons of grouping can outweigh the benefits — and the decision should be made carefully with a CPA who models the multi-year impact.
The self-rental asymmetry is one of the most counterintuitive parts of the tax code for dentists who own their building. You can have a massive tax loss sitting on paper that you cannot use to reduce the taxes you actually owe. The grouping election is the legal remedy — and for the right dentist in the right situation, it can unlock six figures in tax savings in a single year.
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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