A medical office building, dental office or specialty clinic, such as an imaging or surgery center, is generally nonresidential real property, depreciated over 39 years. A cost segregation study identifies within that cost the personal property, which is generally 5-year property for a medical or dental practice, and the land improvements, which are generally 15-year property. In clinical space the candidates include medical gas and vacuum piping, dedicated wiring and plumbing for imaging, sterilization and dental equipment, casework, and nurse call and data systems. The IRS’s Cost Segregation Audit Techniques Guide (Publication 5653) has no matrix for medical buildings, so each classification rests on the general tests and the building’s facts.
No IRS Matrix, So the General Tests Apply
Publication 5653 gives industry-specific guidance, including classification matrices, but not for medical buildings. Its industry chapter covers retail, restaurants, pharmaceutical and biotechnology, casinos and gaming, auto dealerships, auto manufacturing and residential rental property.
The leading case involved hospitals. As Publication 5653 describes Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997), the Tax Court held that the tests developed under the former investment tax credit for identifying tangible personal property also decide whether property is section 1245 property for depreciation. The IRS acquiesced in that holding in AOD 1999-008 but did not agree with the court’s conclusions on the individual hospital assets.
The tests come from Treas. Reg. 1.48-1. Tangible personal property includes property, other than structural components, that is contained in or attached to a building. Structural components include walls, partitions, floors and ceilings with their permanent coverings, central heating and air conditioning, plumbing, wiring and lighting fixtures, and other components relating to the operation or maintenance of the building. Publication 5653 adds the factors courts use to decide whether an item is inherently permanent, such as how it is attached and how much damage removal would cause, and states that there is no general bright-line test.
The asset class sets the recovery period. Asset class 57.0 of Rev. Proc. 87-56, Distributive Trades and Services, includes assets used in personal and professional services and has a 5-year recovery period. It is the class generally applied to the personal property of a medical or dental practice, while office furniture and, in the IRS matrices, telephone and other communications equipment fall in class 00.11 with 7 years. For leased property, Treas. Reg. 1.167(a)-11(e)(3)(iii) generally classifies the lessor’s property as if the lessee owned it.
Components Typical of Medical and Dental Space
| Component | Common treatment | Recovery period |
| Medical gas and vacuum piping serving equipment | Commonly personal property | 5 years |
| Dedicated wiring for imaging, sterilizers and dental units | Commonly personal property | 5 years |
| Dedicated plumbing to dental units and sterilizers | Commonly personal property | 5 years |
| Nurse call, intercom, telephone and data cabling | Commonly personal property | 5 or 7 years |
| Procedure and task lighting | Depends on what it serves | 5 or 39 years |
| Practice identity and directory signs | Commonly personal property | 5 years |
| Exam room casework and reception millwork | Depends on attachment and function | 5 or 39 years |
| Carpet and sheet vinyl | Depends on attachment | 5 or 39 years |
| Radiation shielding in imaging rooms | Practitioners differ | 5 or 39 years |
| HVAC serving imaging or equipment rooms | Building unless the sole justification test is met | 39 or 5 years |
| Exam sinks, restrooms, general power, room lighting and exit signs | Building | 39 years |
| Parking, sidewalks, site lighting and associated landscaping | Land improvements | 15 years |
The table is illustrative and does not state an IRS position. Every row depends on how the item is installed and what it serves.
Dedicated connections follow the equipment. In the hospital case the Tax Court treated special electrical equipment and branch wiring, television equipment and wiring, and telephone equipment, wiring, jacks and intercom equipment as personal property, and it divided the primary and secondary electrical distribution systems by the share of the load carried to equipment. The IRS matrices for other industries likewise treat connections used directly with specific equipment as personal property, and outlets and plumbing of general use as part of the building. No IRS matrix addresses medical gas and vacuum piping in patient care space. It is commonly classified with the equipment it serves, by analogy to the special gas systems the pharmaceutical matrix treats as personal property.
Finishes and casework turn on permanence. The court treated carpeting and vinyl wall and floor coverings as personal property, while the IRS matrices treat coverings attached with permanent adhesive as part of the building and removable ones as personal property. Casework raises the same question: cabinets that can be removed and reused point toward personal property, and millwork built into the walls points toward the building.
Shielding and specialty HVAC are where practitioners differ. Lead shielding built into the walls of an imaging room can be viewed as part of the walls, which the regulation lists as structural components, or as property that exists only for the equipment. HVAC is a structural component unless the sole justification for a unit is a temperature or humidity requirement essential to operating other machinery, and the IRS matrices treat a system also installed for occupant comfort as part of the building.
Equipment the practice buys is already personal property. Imaging units, dental chairs, sterilizers and exam tables are generally depreciated by the practice as 5-year property and are not part of the building’s cost. The study addresses the building-side work installed for them.
When the Practice Rents From Its Owners
The building is often held in a separate entity that leases it to the practice. A rental activity is generally passive under section 469(c)(2), but under Treas. Reg. 1.469-2(f)(6) net rental income from property rented to a business in which the owner materially participates is treated as not from a passive activity. That rule speaks to net income. A net rental loss, which accelerated depreciation can produce, generally remains passive.
Grouping can change that result, within limits. Treas. Reg. 1.469-4(d)(1) allows a rental activity to be grouped with a business activity only where the two form an appropriate economic unit and either one is insubstantial in relation to the other or each owner of the business has the same proportionate ownership interest in the rental, in which case the part of the rental used in the business may be grouped. A grouping generally cannot be changed in later years, and a narrower rule applies where the practice is a C corporation subject to section 469. Our article on grouping rental and business activities introduces the subject, and ownership percentages should be reviewed with the practice’s CPA before a study’s deductions are projected.
Tenant Buildouts, Purchases and Renovations
In a multi-tenant building, ownership of the buildout decides who depreciates it. A tenant can generally depreciate improvements it pays for and owns. Section 110 adds a specific rule: a landlord’s construction allowance under a lease of retail space for 15 years or less, spent on qualified long-term real property that reverts to the landlord, is excluded from the tenant’s income, and the property is treated as the landlord’s nonresidential real property. Treas. Reg. 1.110-1(b)(2)(iii) lists services provided by doctors among its examples of services typically sold to the general public, so space a practice uses to serve the public can be retail space for this purpose.
Bonus depreciation follows the acquisition and placed-in-service dates. Under section 168(k) as amended by the One Big Beautiful Bill Act (OBBBA), the 5-year and 15-year property a study identifies generally qualifies for 100 percent bonus depreciation if it is acquired and placed in service after January 19, 2025. Property is not treated as acquired after the date a written binding contract for it is entered into, and for a building the owner constructs the test is generally whether physical work of a significant nature began after January 19, 2025 (Treas. Reg. 1.168(k)-2(b)(5), as applied by Notice 2026-11). Property acquired before January 20, 2025 stays on the phase-down: 40 percent if placed in service in 2025 and 20 percent in 2026. The 39-year building does not qualify under section 168(k). A building bought after someone else has used it is used property, so its components qualify only if the purchase meets the acquisition tests in our article on bonus depreciation for used property.
Renovations and equipment replacements raise two more questions. Interior improvements the taxpayer makes to an existing nonresidential building, after the building was first placed in service, can be 15-year qualified improvement property under section 168(e)(6), which excludes enlargements, elevators and escalators, and the internal structural framework. Wiring, piping and other work installed for replacement equipment is classified under the tests above. For the components removed, the partial disposition election can let the owner recognize a loss for their remaining basis, and it is made on the timely filed original return, including extensions, for the year of disposition.
CSSI Services’ page on cost segregation for medical offices and our medical office and dental office case studies show how individual buildings divided among the classes. Across property types, CSSI’s cost segregation studies reclassify, on average, 20% to 40% of building value into shorter recovery periods, depending on the asset. If you own, are buying or are renovating a medical or dental building, request a no-cost analysis.
Frequently Asked Questions
Does the IRS publish a cost segregation matrix for medical office buildings?
No. Publication 5653 includes matrices for industries such as retail, restaurants and auto dealerships, and none for medical buildings. Classifications rest on the general tests in Treas. Reg. 1.48-1 and the case law the guide describes.
Is a dental office classified differently from a medical office?
The tests are the same. Dental offices typically have plumbing, vacuum, compressed air and wiring run to each operatory, and those connections are commonly treated as 5-year personal property where they serve specific equipment. Each item still depends on its facts.
Is medical or dental equipment part of a cost segregation study?
Generally no. Equipment the practice buys, such as imaging units, dental chairs and sterilizers, is already depreciated as personal property, generally over 5 years. The study addresses the building and the work installed for that equipment.
Can depreciation on the building offset income from the practice?
It depends on the passive activity rules. Where an owner who materially participates in the practice also owns the building entity, net rental income is generally treated as nonpassive, while a net rental loss generally remains passive unless the rental is properly grouped with the practice under Treas. Reg. 1.469-4(d)(1) or another exception applies.
This article provides general information about federal tax rules and is not tax advice. Speak with your tax adviser about your specific circumstances.
