The most common and cleanest structure is to hold the building in a separate LLC from the medical practice. The practice operates as its own entity. The property sits in a different entity, often a real estate holding LLC. The practice then pays rent to the property LLC just like it would pay rent to any landlord.

This separation requires two completely independent sets of books. The practice tracks its own revenue, payroll, medical supplies, equipment, insurance, and operating costs. The property LLC tracks its own mortgage payments, depreciation, property taxes, building insurance, maintenance, and the rental income it receives from the practice. The two should never share bank accounts, credit cards, or commingled transactions.

The rent the practice pays must be at fair market value. This is the part where doctors often get into trouble. If the practice pays $2,000 per month for a space that would lease for $6,000 on the open market, the IRS can reclassify that arrangement. If it pays $10,000 for a space worth $6,000, that raises questions too. Get a comparable market analysis or an appraisal to document what fair rent looks like for the space, and put a formal written lease in place between the two entities. Treat it like an arms-length transaction because that is exactly what the IRS expects.

From a bookkeeping standpoint, the practice records rent as an operating expense. The property LLC records it as rental income. The property LLC then separately tracks its own expenses against that income. Depreciation on the building is one of the biggest tax advantages of this structure, but it only works when the property entity’s books are maintained properly with accurate cost basis, improvement tracking, and depreciation schedules.

Things that commonly go wrong include paying building expenses from the practice bank account, not having a lease on file, setting rent based on what the doctor “feels like” rather than market rates, and letting personal expenses for the building flow through either business entity. Any of these can weaken the liability protection the separate LLC provides and create tax problems.

If the doctor also has personal expenses related to the building that aren’t business costs, those need to stay completely out of both sets of books. A personal credit card or personal bank account handles anything that isn’t a legitimate business expense of either entity.

This kind of multi-entity setup is common in medical and dental practices, and it works well when each entity has disciplined bookkeeping from the start. The more entities involved, the more important it becomes to keep clean boundaries between them. Experienced bookkeepers in Buena Park who work with healthcare groups see this structure regularly and can set up your chart of accounts, bank feeds, and reporting so both entities stay organized and audit-ready from day one.