In Part 3 of the Cost Segregation series, Wes Read shifts from theory to execution. He walks through the five concrete implementation steps every dentist must follow to set up the strategy correctly, runs a detailed numerical example showing exactly how the money flows between the dental S-Corp and the real estate LLC, covers how to determine the right rent amount without triggering IRS scrutiny, and closes with three options dentists should consider when it comes time to retire and decide what to do with the building.

Wes lays out the exact sequence for setting up cost segregation correctly:

• Step 1: Form the LLC first. The LLC must be the purchaser on the deed. Do not buy the building personally and transfer it later.
• Step 2: Close on the building. The LLC takes out its own mortgage, personally guaranteed by the dentist. This is standard and should not be a deterrent.
• Step 3: Commission the cost segregation study. Hire a qualified engineering firm (not your general CPA) to do a room-by-room breakdown of all tangible assets into their correct depreciation buckets (5, 7, and 15-year categories vs. the standard 39-year).
• Step 4: Execute a formal, arms-length lease agreement between the Dental S-Corp and the Real Estate LLC. Get a market rent analysis from a licensed commercial real estate broker to document the rate and protect yourself in the event of an audit.
• Step 5: Keep clean books. Maintain completely separate bank accounts for the LLC and the S-Corp. A clean Chinese wall between entities is non-negotiable.

Using a dentist collecting $1.2M per year:

• Dental S-Corp: $1.2M collections, less $600K clinical expenses, less $170K rent paid to the LLC = $430K net K-1 to the dentist.
• Real Estate LLC: $170K rent collected, less $80K mortgage interest = $90K taxable income before depreciation.
• After $200K in cost segregation depreciation, the LLC runs a loss of $110K. The $170K of rent is completely sheltered, with zero taxes owed.
• If the dentist's spouse qualifies as a real estate professional (750+ hours/year), the $110K loss can be applied directly against the $430K of dental income an additional six-figure deduction.

The IRS requires rent to be at fair market value. Inflating rent to absorb 100% of cost segregation depreciation is a red flag and can result in full disallowance of the deduction plus penalties. Wes advises:

• Hire a licensed commercial real estate broker to provide a market rent analysis in writing.
• Consider getting two brokers' opinions and taking the higher of the two.
• Have a real estate attorney memorialize the agreed rate in a formal lease agreement.
• Optimize within the range 'toe the line, don't cross it.'

When it's time to hang up the drill, dentists who own their building have three paths:

• Option 1: Keep the building and collect passive rental income from the successor dentist or a new tenant. Reliable income, but requires ongoing management.
• Option 2: Sell the building, pay capital gains tax, and invest the proceeds in dividend-paying stocks or other passive assets. Cleanest exit for those who don't want to manage real estate in retirement.
• Option 3: Execute a 1031 exchange into a larger property, deferring all capital gains taxes. If carried through death, heirs receive a step-up in basis, and the gain disappears entirely one of the most powerful wealth-transfer strategies available.