In Part 2 of this series, Wes Read builds on the cost segregation foundation from Part 1 to cover the critical structural decisions every building-owning dentist must get right. He opens with a firm warning against holding your building inside your S-Corporation, walks through the correct two-entity structure, and then dives into passive activity rules — including the often-asked question about qualifying a spouse as a real estate professional.

Wes outlines four major reasons why placing your building inside your dental S-Corporation is one of the most costly mistakes a dentist can make:

• Extraction is a tax nightmare. Pulling real estate out later triggers a taxable distribution at fair market value, potentially creating a $200K-$250K tax bill
• Liability exposure: the building is exposed to malpractice claims and employment disputes inside the operating entity
• Financing complications, lenders underwrite commercial real estate separately; mixing it with operating assets creates problems for refinancing and equity lines
• State licensing compliance in many states, non-dentists cannot own a dental professional corporation; a separate LLC keeps ownership clean

The correct setup involves three layers:

• You (the dentist) file a personal 1040 tax return
• Dental S-Corporation owns the practice, generates clinical revenue, and pays rent to the building LLC
• Real Estate LLC (disregarded, single-member) owns the building, collects rent, deducts mortgage interest and building expenses, and applies cost segregation depreciation

The dental S-Corp pays rent to the real estate LLC. This reduces K-1 taxable income from the dental practice. The rental income in the LLC is then offset by expenses, including mortgage interest, maintenance, and most importantly, cost segregation depreciation.

A disregarded LLC provides state-level liability protection but does not exist as a separate entity for federal tax purposes. It files directly on Schedule E, Page 1 of your personal 1040, the lowest-cost, simplest filing structure.

If married, spouses can often be treated as a single member (check your state). If a non-spouse partner is involved, the LLC must file as a partnership — a separate tax return.

Rental income and losses in your building LLC are classified as passive. Key points:

• Passive losses can offset passive income (rent collected) dollar-for-dollar — potentially making rental income tax-free in early years
• Passive losses generally cannot offset W-2 or K-1 income from your dental practice
• Exception: if your AGI is under $100,000, up to $25,000 of passive losses can offset active income
• For owner-operated buildings (you are both tenant and landlord), limitations are stricter

If you or your spouse qualifies as a real estate professional (750+ hours per year, more than any other professional activity), all passive losses from the building LLC can offset any income, including dental W-2 and K-1. This can create a $400K-$500K year-one deduction that nets against dental income.

For most practicing dentists, this is not achievable. However, for dentists with a stay-at-home or non-working spouse, having the spouse obtain a real estate license, manage properties, and log 750+ hours is a legitimate and powerful strategy. This must be well-documented and is audit-sensitive.