If you own the building your dental practice works in, the IRS’s default treatment spreads its cost over 39 years. On a $1.5 million building, that’s roughly $32,700 a year in depreciation, and most dentists never look at it again.
A cost segregation study can turn that into about $405,000 of deductions in the first year. The difference shows up in your tax bill, not just on paper.
The short answer: a cost segregation study is an engineering report that splits your building into parts. The parts that aren’t the building itself, like plumbing for the operatories, dedicated electrical and cabinetry, can be depreciated over 5, 7 or 15 years instead of 39. Under the 2025 tax law, those parts qualify for 100% bonus depreciation, so they can be deducted in the first year. If the building sits in a separate LLC that rents to your practice, you need one more step, the grouping election, or the deduction can get stuck.
Why a dental building is a strong fit
Without a study, the IRS treats your whole building like one big box: 39 years, straight line. In reality, a dental office is built around equipment and specialty infrastructure, which makes it unusually good for cost segregation:
- plumbing for every operatory and the sterilization area,
- vacuum lines, the compressor and air systems,
- dedicated electrical for chairs, lights and imaging,
- lead-lined walls for X-ray and CBCT rooms,
- specialty cabinetry and millwork, and
- parking lots, sidewalks and landscaping (15-year property).
An engineer walks the building, sorts these costs out and documents them in a report your CPA uses on the tax return.
The numbers on a $1.5 million building
Here’s how it works on a $1.5 million building (illustrative numbers):
- Set aside the land. Land can’t be depreciated. Say it’s 15%, or $225,000. That leaves $1,275,000 to depreciate.
- Reclassify. A study typically moves about 30% of that, or $382,500, into 5-, 7- and 15-year property.
- Deduct it in year one. The 2025 tax law made 100% bonus depreciation permanent for property acquired after January 19, 2025, so the whole $382,500 can be deducted in the first year. The remaining $892,500 stays on the 39-year schedule.
| Without a study | With a study | |
|---|---|---|
| Practice + building income before depreciation | $560,000 | $560,000 |
| Year-one depreciation | about $32,700 | about $405,000 |
| Taxable income | about $527,000 | about $155,000 |
That’s about $372,000 in extra deductions in year one. At a 34% combined tax rate, it’s roughly $126,000 less tax. After a study fee of about $8,500, the practice keeps around $118,000.
One thing to remember: this is acceleration, not elimination. When you sell the building, part of that depreciation comes back as taxable income (called depreciation recapture). The cash you keep today can still be worth a lot, especially if you plan the sale years ahead.
Already own your building? You can still catch up
If you bought or built your office years ago and never had a study, you didn’t miss your chance. A look-back study lets you claim all the depreciation you didn’t take in a single year, without amending old returns. Your CPA files Form 3115 (a change in accounting method) with your current return.
How much it’s worth depends on the year you bought the building and the bonus depreciation rules that applied then. Buildings bought after January 19, 2025 get the full 100%.
Buying a building? Decide before you close
If you’re still shopping, cost segregation changes how you compare options. A building that looks $100,000 more expensive on paper can be the better buy after taxes, if more of its cost sits in short-life components, like a recently built-out office with six to eight purpose-built operatories and imaging rooms.
Before you make an offer, ask the seller for the plans and the build-out invoices. The study is done for the year the building is placed in service, so plan it before you close, not after.
The trap: your building LLC and the self-rental rule
Most dentists hold the building in a separate LLC that rents it to the practice. That’s usually smart for liability and for a future sale. But it creates a tax trap.
Under the self-rental rule, rent your practice pays your own building LLC counts as non-passive income. A loss from that same LLC stays passive. In the example above, the building shows a loss of about $345,000 after the study. Without a fix, that loss is suspended, and the savings never show up on this year’s return.
The fix is a grouping election under Treasury Regulation 1.469-4, which treats the building and the practice as one activity so the loss can offset your practice income. It generally requires the same ownership in the building and the practice. Holding the building separately from the practice, or selling a share of the practice to an associate or partner who doesn’t also own the building, can break the group.
Your cost segregation checklist
- Hold the building in a separate LLC, owned in the same percentages as the practice.
- Sign a written lease, and make sure the practice pays rent on time.
- Order the cost segregation study for the year the building is placed in service, or a look-back study if you already own it.
- Make the grouping election on your return.
- Check whether your state follows federal bonus depreciation. New York, New Jersey and California don’t, so your state deduction can be smaller.
- Put the exit on the calendar now. Plan for recapture years before a buyer asks.
Buying equipment for the practice before the year ends? Read Buying Dental Equipment Before December 31: What Counts for 2026. For all 8 year-end moves, get our free Year-End Tax Checklist for Dentists.
Is a cost segregation study worth it for you?
Book a free strategy session. We’ll look at your building, when you bought it, how it’s owned, and whether a study makes sense for your numbers, before you pay for one.
Book your free strategy session
Frequently asked questions
What is a cost segregation study?
It’s an engineering report that breaks a building’s cost into parts with shorter tax lives (5, 7 and 15 years) instead of depreciating the whole building over 39 years. The faster schedule means bigger deductions in the early years.
How much does a cost segregation study cost?
It depends on the building’s size and complexity. For a typical dental office, studies often run in the high four to low five figures. In the example above, an $8,500 study unlocked about $372,000 of extra first-year deductions.
Can I do cost segregation on a building I bought years ago?
Yes. A look-back study lets you claim the missed depreciation in one year by filing Form 3115 with your current return, without amending prior returns.
Does cost segregation work if I lease my office space?
Not on the building itself, since you don’t own it. But improvements you pay for inside leased space, like a build-out, can often be depreciated faster. Ask your CPA how your build-out was recorded.
What happens when I sell the building?
Part of the depreciation you took is taxed again as depreciation recapture. That’s why the sale should be planned years ahead, so the timing and structure keep as much of the benefit as possible.
About the author
Natalya Grigoriev, CPA is the President of Custom Accounting CPA, a Certified Tax Coach and Certified Tax Planner, and the author of two Amazon books on tax planning. Her team works with dental practice owners nationwide on proactive tax strategy, entity design, retirement plans and practice transitions. In 2025 alone, Custom Accounting CPA saved $2,019,302 in taxes for 53 clients.
General education, not tax advice.
