purchasing office/Ambulatory surgery building; Income tax implications later?

[Wudoc111]

Newbie to retirement planning and also to real estate.

My wife's practice (LLC) is strongly considering expansion with the purchase of an existing medical/ambulatory surgery building. 1/2 of the space is leased currently leased to an outside surgical specialty group and used as an ambulatory surgery center.  They are going through the usual discovery, valuation, and expected capital expenditure reviews.  Currently wife's practice is leasing space at another facility and I could understand the group's desire to own their own offices and have the flexibility of expanding.

My wife and I are probably both 2/3rd into our careers and thus looking at retirement planning.  We are pretty frugal and at time of retirement, can probably utilize "0" % capital gain tax harvesting if we plan it correctly at age 55-70 1/2 before the pension (age 65), IRA RMDs, SSI kicks in.

But I have some reservations about the purchase especially on the unneeded risk. I have copied the various benefits and risks mentioned in this forum to my wife but was wondering about how this will affect our retirement tax strategy - specifically capital gain harvesting?

1) specifically the K1 proceeds from the rental income from the non affiliated surgeons leasing the ambulatory surgery portion. I would assume this would be still considered "active income" but could there be an instance were it would be "passive income?"  I suspect some of this income would be offset by depreciation of capital expenditures.

2) at retirement and if the existing partners had to buy out my wife's portion of the building and she were to finance the loan, I would assume that loan interest is also income.

3) in general, all of this would be the same as for any brick and mortar real estate investments with tenants and is there any other tax consequences not obvious?

I realize the default of 15%/20% with capital GAINS is still very reasonable and who knows what the tax margins will be shortly. Also I am probably making something more complicated then it really is.

Thanks in advance guys and love our forum!

[jfoxcpacfp]

I'm not going to dive into your questions yet because there may be no need to. Your wife's LLC would be wise to set up a separate LLC to purchase the real estate. In fact, I would be surprised if they were not planning to do so and you just aren't aware of this yet or the discussions have not gotten that far. In that event, your wife can simply begin due diligence on whether or not to be a part of that deal based upon how well it fits in with your overall financial plans. At this stage of your careers, it may be a perfect fit - or it could be a disaster. Definitely a discussion you want to have with your financial planner.

Or, perhaps this is what you were referring to all along? Once I have this answer, will be happy to go further.

[Wudoc111]

Thanks Johanna,

I agree that I am only seeing part of the picture. Always difficult being the spouse and not knowing when to help out or just listen. Dived into more reading per your guidance: own the building in a separate LLC and lease it back to the practice, to keep it safe from claims.

Financial advisor/planner meeting in am   (new guy but just road testing him); Wife's partner meeting with her CPA about some of my questions as well.

Again, thanks and appreciate all of your support on this forum and elsewhere.

[jfoxcpacfp]

Wudoc111 wrote:

own the building in a separate LLC and lease it back to the practice, to keep it safe from claims.

Click to expand...

That's not the only reason. Real estate ownership and business ownership are 2 separate objectives (i.e. goals) that can be separated in this way. Your situation is a perfect example. In retirement, your wife will no longer want to be a business owner, in fact, may be precluded from business ownership, but may be allowed to continue to be a passive owner of the investment property. That is something the owners will have to determine when they draw up the operating agreement. If it is all combined in the same entity, that will not be possible.

[WealthyDoc]

I agree a separate LLC is indicated.

Most likely the K-1 income will be taxed as ordinary income.  Am I correct tax experts here?  That has been my experience.

I also agree this could turn out well.  The question is at this point should you be taking any risks?

 

[jfoxcpacfp]

WealthyDoc wrote:

Most likely the K-1 income will be taxed as ordinary income.  Am I correct tax experts here?  That has been my experience.

 

Click to expand...

No, rental income is passive and will be taxed as such. It is only ordinary income if the participant follows the rules as an active real estate business owner and that is not the situation here.

[Wudoc111]

Thanks again guys for the updates.

[OralMaxillofacial]

Can you expand upon the rental income is passive?  I am paying ordinary income on mine....

[jfoxcpacfp]

OralMaxillofacial wrote:

Can you expand upon the rental income is passive?  I am paying ordinary income on mine….

Click to expand...

I'm very sorry, I was not clear in my explanation. Of course, you will pay taxes at ordinary income tax rates, even though rental income is passive. There is no issue until you have losses, which can offset only passive income. If you are in a lower tax bracket, you are able to deduct up to $25k of losses, but n/a for most doctors.

So sorry for the confusion - I have been posting answers today on the fly today from the SE Surgical Congress lol.