What if your medical office building could generate over $1.1 million in first-year tax deductions, enough to fund new equipment, expand hiring, and accelerate physician bonuses? This isn't theoretical. It's what we delivered for a physician group after conducting a cost segregation study on their $9 million multi-specialty facility with imaging suites, surgical procedure rooms, dental operatories, and high-end mechanical systems designed for strict clinical standards.
Stories like this are common in healthcare real estate. Medical office buildings are loaded with fast-depreciating assets, specialty plumbing, high-capacity electrical, medical cabinetry, imaging infrastructure, and HVAC systems built for infection control. But unless you break them out properly, the IRS treats everything like a 39-year building, even components that clearly don't last that long.
Here's what matters: The IRS allows you to reclassify these components into 5-, 7-, or 15-year depreciation categories. Instead of waiting decades to recover your investment, you can claim substantial deductions immediately.
R.E. Cost Seg specializes in working with healthcare property owners, physician groups, and medical developers to uncover the hidden value in every property. Our engineering-based studies typically reclassify 40% to 50% of a medical office building's depreciable basis into shorter-life categories, generating six-figure to seven-figure tax savings in year one.
This article breaks down exactly which medical office building components qualify for accelerated depreciation and what it means for your bottom line.
How Cost Segregation Works for Medical Office Buildings
Cost segregation is a tax strategy that accelerates depreciation by identifying parts of your facility that can be written off over shorter timeframes. Instead of applying the standard 39-year schedule to everything, a proper study breaks out components like specialty lighting, high-capacity electrical, medical cabinetry, or site improvements, and classifies them as 5-, 7-, or 15-year assets.
Medical office buildings are especially good candidates because they often contain expensive, use-specific infrastructure. Think of radiology suites, built-in equipment supports, or specialty HVAC systems designed for infection control. These aren't generic improvements; they're part of the clinical operation, and the tax code recognizes that distinction.
When properly reclassified, these elements can be deducted much faster, sometimes all in the first year under bonus depreciation rules. That can result in hundreds of thousands in accelerated deductions, especially on newer facilities or major tenant build-outs.
Why Medical Office Buildings Are Ideal for Cost Segregation
Medical office buildings (MOBs) occupy a middle ground between traditional commercial space and full-scale healthcare facilities. But when it comes to tax treatment, they have more in common with hospitals than office parks.
Here's why MOBs offer such strong cost segregation potential:
- Complex build-outs: Clinical areas often require plumbing, ventilation, shielding, and finishes that go far beyond standard tenant improvements.
- Integrated medical infrastructure: Gas lines, data wiring, and equipment-specific electrical systems are often embedded in walls or ceilings.
- Shorter asset lives: Many of these systems and finishes qualify for 5-, 7-, or 15-year depreciation (if they're correctly identified).
- Frequent renovations: Medical practices update spaces often, meaning you may have multiple layers of build-out costs to capture.
A typical office building might yield 20-30% of its value in short-life assets. A medical office building can often exceed 40%, especially when it includes imaging, surgical, or high-tech diagnostic areas.
What a Proper Study Looks Like in a Healthcare Setting
Let's say you've developed or acquired a $6 million medical office building. It includes a physical therapy wing, a diagnostic imaging suite, dental operatories, and outpatient exam rooms. A thorough cost segregation study might reveal:
- Total property cost: $6 million
- Reclassified to short-life assets: $2.5 million (about 42%)
- First-year deduction (with 100% bonus depreciation): $2.5 million
- Tax savings (at 30% combined rate): ~$750,000
But these results aren't automatic; they depend on a properly executed study. That means:
- Reviewing architectural plans, contractor invoices, and MEP (mechanical, electrical, plumbing) specs
- Walking the facility to document asset use and construction details
- Separating clinical areas from general-use zones
- Identifying tenant improvements that may qualify
Medical spaces require a specialized lens. A standard office cost segregation template won't catch the nuances, and could understate (or misstate) your deductions.
Common Missteps in Medical Office Cost Segregation
Cost segregation is highly effective, but only when tailored to the property. These are the most common mistakes I've seen in the healthcare space:
- Treating clinical areas like generic office space: Procedure rooms, imaging bays, and dental suites often qualify for accelerated treatment, but only if clearly identified.
- Using templates instead of engineering-based studies: A cut-and-paste report won't capture the unique details of medical infrastructure and won't stand up in an audit.
- Ignoring tenant improvements: Build-outs for physician tenants may be owner-funded and depreciable, but often get missed without a detailed review.
- Failing to separate shared-use areas: Lobbies, waiting rooms, or admin zones may not qualify. Accurate space-use allocation is essential.
- Overlooking documentation: Without construction drawings, specs, or cost breakdowns, you can't defend asset classifications under IRS review.
Working with a firm experienced in healthcare real estate reduces these risks and ensures your deductions are accurate, supported, and optimized.
Steps to Take Before Starting a Cost Segregation Study for Your Medical Office Building
If you own or develop medical office buildings, a few early steps can help set your cost segregation study up for success:
- Choose a qualified provider: Look for experience with healthcare properties and engineering-based studies, not just tax prep.
- Gather build-out documentation: Plans, specs, and contractor records will guide accurate reclassification.
- Separate clinical and non-clinical spaces: Be ready to clearly define use by area. This impacts depreciation eligibility.
- Review recent renovations: Past improvements may still qualify for a look-back study and accelerated deductions via Form 3115, no amended returns required.
- Align with your tax strategy: Coordinate with your CPA to ensure depreciation decisions fit within your broader financial planning.
These steps make the study faster, more accurate, and more financially impactful.
Choosing the Right Partner for Medical Office Cost Segregation
Medical office buildings carry unique cost structures and require a precise approach to tax treatment. The right cost segregation partner can uncover deductions others might miss, while ensuring full IRS compliance.
If you're building, acquiring, or renovating a medical facility, now is the time to ask whether your depreciation schedule reflects the real structure of your investment. R.E. Cost Seg specializes in engineering-driven studies for complex properties like MOBs, helping healthcare owners capture value that would otherwise go unclaimed.
