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April 12, 2008

By Margaret M. Boyle, CPA, CVA

At some point in your career, you may need to evaluate your current practice location and make the difficult decision of continuing to rent space or buying your own facility. For some, the decision will come quickly and easily. For most, the decision can be quite difficult and many factors must be considered. While there is no single recipe for making this decision, you must at least be aware of myriad factors to consider.

There are many reasons to consider buying a building instead of renting:

• Maintain control of the facility including its maintenance and costs
• Find better or more space (image, size, or location) that is not available through the rental market
• Diversify your investment portfolio
• Lower purchase vs. rental costs in your area
• Provide a project for an otherwise bored dentist
• Or (the most common we hear) "my sister-in-law who's in real estate said I'm foolish not to own"

If you have the bug to own instead of rent your space, you need to consider the overall financial impact of your decision. The purchase of a building may be the single largest investment many dentists will make except for perhaps a personal residence and the dental practice. Considerable attention should be given to your overall financial plan and long-term objectives. We recommend the dentist have a solid financial structure including:

• An overall personal financial plan and an understanding of how ownership will impact it
• Established retirement and after-tax investment accounts that will not be hindered by the purchase
• Healthy cash flow, both personally and at the practice
• Manageable practice and personal debt
• An expectation for continued growth in the practice
• Available time and energy for your new role as "landlord"

Assuming you have jumped those hurdles and decided to pursue purchasing, you will want to assemble a team of professionals: dental CPA, dental attorney, real estate professional, lender, equipment dealer, and designer, at a minimum. While many dentists like to think they are better doing the project on their own and saving money, in the end, the added cost for an experienced and knowledgeable team is far outweighed by the benefits of avoiding major pitfalls. Your team will help you evaluate the options available, more accurately estimate the total costs, obtain competitive financing, and manage the project, allowing you to focus on patient care, production, and managing your practice.

If the purchase of the building turns into an even bigger project of buying land and constructing a building from the ground up (or even a major remodel), there are significant financial, tax, and legal considerations — for example, performing a cost segregation study to maximize your income tax deductions and minimize taxes, qualifying and applying for tax credits related to rehabilitating old or historic buildings and breaking out costs, or being in compliance with the ADA (Americans with Disabilities Act) credit.

Your dental CPA and team of professionals will help you decide how to properly structure the purchase and ownership of the building including the following considerations:

• Should you own the building outside the practice to better segregate your assets and protect them from lawsuits?
• Are you planning for a partner to buy in at some point?
• Do you want to be able to sell a portion of the building eventually?
• Do you plan on keeping the building long term to extend the income stream after you have sold the practice and retired?
• Which entity should pay for building maintenance?

This discussion represents a summary of some of the key issues you should consider. There are myriad other issues beyond the scope of this article. For example, each state has different tax rules and laws that need to be considered in addition to federal tax law.

In the end, the decision of whether to continue as a renter or buy your own space will likely be decided not just by the numbers and tax benefits but also by your emotions and other intangible items. In either case, take the time up front to assemble a team of professionals who will help you achieve your goals and help you avoid the "money pit."

Margaret M. Boyle, CPA, CVA, is a principal of the Dental Group, LLC, Martin Boyle, PLLC, and Dental Wealth Advisors, LLC. An Academy of Dental CPA's member located in Kirkland, Wash., the Dental Group companies provide practice and financial management consulting, tax and financial planning, and investment advisory services exclusively to dentists and their practices. Maggie can be reached at (425) 216-1612 or MMB@cpa4dds.com.

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