# Cost segregation for medical offices and clinics

What a study examines in a medical office or clinic: equipment wiring and plumbing, casework, imaging rooms, build-outs and site work, and the evidence needed.

## Short answer

A medical office or clinic is nonresidential real property, so the building is depreciated over 39 years. What makes it different from an ordinary office is what the practice needs inside it: dedicated electrical circuits and plumbing for clinical equipment, imaging rooms, exam-room casework, special ventilation, medical gas, and heavy tenant build-outs that are often replaced when a practice moves or expands. Some of those items are equipment or equipment connections that may be 5- or 7-year property; many others, such as exam-room sinks, general lighting, partitions and central HVAC, are structural components that stay with the building. Site work such as parking, lighting, drainage and landscaping is generally 15-year property. Most questions about medical office building depreciation come down to where those lines fall. A medical office cost segregation study is valuable because it draws those lines item by item and records why. This article covers what is examined, the evidence that matters, the common traps, and how the study fits with your tax adviser's work. It is general education, not tax advice.

## Who owns what in a medical building

Before any classification, settle ownership. Medical buildings are commonly owned in one of three ways: a practice owns its building directly; the physicians own the real estate in a separate entity that leases it to the practice; or an investor owns a multi-tenant medical office building and leases suites to practices. Each arrangement changes who paid for which improvements and who depreciates them.

- **The building owner** depreciates the shell, the site and the improvements it paid for, including tenant improvements it funded.
- **A tenant practice** depreciates the build-out and equipment it paid for.
- **For a lessor**, the IRS guide explains that the asset class of leased property is determined as if the lessee owned it, so equipment-related property a landlord provides for a medical tenant is classified by reference to the tenant's activity.

A clinic cost segregation study should state whose assets it covers. Studies that mix landlord and tenant costs are a frequent source of errors.

## What a study examines in a medical office

| Component group | Typical treatment to examine | Examples |
|---|---|---|
| Land | Not depreciable | The site |
| Building shell and systems | 39-year nonresidential real property | Structure, roof, exterior, general electrical and lighting, central HVAC, general plumbing and fixtures, elevators, fire protection |
| Site improvements | Generally 15-year land improvements | Surface parking, curbs, sidewalks, site lighting, drainage, landscaping, monument sign foundations |
| Clinical equipment and its connections | Often 5-year property on their facts | Imaging and treatment equipment, dedicated circuits and plumbing serving specific equipment |
| Furniture, casework and technology | 5- or 7-year on their asset class | Waiting-room and office furniture, removable casework, computers and practice-management systems |
| Interior improvements after the building was placed in service | May be 15-year qualified improvement property | Suite build-outs, reconfigured exam areas, new interior finishes |

The rows show where questions usually land, not answers for your building. Classification turns on function and the law, the approach the Tax Court took in Hospital Corporation of America, which concerned a hospital and allowed short-life treatment for some components and not others.

## Clinical items that need a written analysis

Medical facilities carry more items near the line between building and equipment than most property types. A careful study addresses each with its reasoning:

- **Electrical.** The IRS guide describes a functional allocation of the electrical system: hook-ups and branch circuits that serve lighting, general outlets, HVAC and other building services stay with the building, while circuits that supply dedicated equipment used in the business may be treated as equipment. An imaging suite or a procedure room with dedicated circuits is where this analysis matters.
- **Plumbing.** The regulations list plumbing and plumbing fixtures, such as sinks, as structural components. Exam-room hand sinks are generally part of the building. Dedicated water and drain lines serving a specific item of equipment, such as a sterilizer or laboratory unit, are examined separately.
- **HVAC.** Central heating and cooling are structural components. Supplemental units installed solely to meet temperature or humidity requirements essential to the operation of specific equipment may fall outside that category under the regulation's sole-justification test; comfort cooling for patients and staff does not.
- **Imaging rooms.** Shielding, reinforced floors and special enclosures raise the question of whether the item is part of the building or part of the equipment it serves. The answer depends on how it is built, whether it would be removed with the equipment, and the authority the practitioner relies on. Expect a written explanation, not a label.
- **Casework and millwork.** Removable cabinets and counters that serve the practice may be personal property; built-in finishes that are part of the room usually are not.
- **Medical gas, nurse call and low-voltage systems.** These need item-by-item analysis of what they serve.

## Build-outs, renovations and replacements

Practices remodel. A suite reconfigured for a new specialty, a new imaging room, or a refreshed waiting area is a new asset with its own placed-in-service date. Interior improvements made by the taxpayer to a nonresidential building after the building was first placed in service may be qualified improvement property, which is 15-year property and qualified property for bonus depreciation, unless the cost is for an enlargement, an elevator or escalator, or the internal structural framework.

Replacements create the other half of the picture. When a build-out is removed, the owner may be able to treat the retired portion as a disposition by making the partial disposition election, and a lessor's improvements made for a tenant and abandoned at the end of the lease are treated as disposed of at that time. A detailed asset list from the original study is what makes those later write-offs computable.

## New construction, acquisition and practice moves

A practice that builds its own facility has construction records, and the study works from actual costs, allocating indirect costs such as design fees and permits across components by a stated method. A buyer of an existing medical building has no such records; the practitioner allocates the purchase price after separating the land, using measured quantities and documented unit costs, and identifies which suites, equipment rooms and site work exist on the date of purchase. When a practice relocates, the old suite's build-out may be abandoned or demolished and the new one is a fresh set of assets, so the timing of a study and of the practice's move belong in the same conversation.


- **Construction records:** schedules of values, pay applications, change orders, and subcontractor invoices by trade, especially electrical, plumbing and mechanical.
- **Drawings:** architectural, electrical, plumbing and mechanical plans, including equipment schedules that show which circuits and lines serve which equipment.
- **Equipment vendor documents:** installation requirements for imaging and other clinical equipment, which explain why dedicated circuits, plumbing or ventilation exist.
- **Leases and work letters:** who paid for each tenant improvement and what happens to it at lease end.
- **Closing statement and land support** for an acquired building.
- **A site visit** to confirm what was built and what has since been removed.

## Common pitfalls

- **Classifying all medical-suite electrical and plumbing as equipment** without the functional allocation the IRS guide describes.
- **Treating exam-room sinks and general lighting as personal property** when the regulations list plumbing fixtures and general building services as structural.
- **Mixing landlord and tenant costs** in one study.
- **Assuming interior work in an acquired building is qualified improvement property** without checking who made the improvement and when.
- **Missing dispositions** when build-outs are demolished.
- **Applying a percentage from another clinic.** Equipment mix and build-out vary too much between specialties for that to mean anything.

## How the study fits with your tax adviser's work

The study classifies and documents. Your tax adviser decides how the results are used: whether bonus depreciation or section 179 expensing is used for eligible property, whether elections out of bonus depreciation make sense for some classes, how a look-back study is implemented through a change in accounting method, whether losses are usable under the passive activity rules for an owner who leases the building to a related practice, and what recapture looks like at sale. Related-party leases between physicians and their practice raise their own questions that the adviser should address before the study begins. State conformity to federal bonus depreciation varies; ask.

## Questions to ask a practitioner

1. Whose assets does the study cover: the building owner's, the practice's, or both, and how will you separate them?
2. How will you allocate the electrical system, and will the report show the method?
3. How do you treat imaging rooms, shielding and dedicated mechanical systems, and what authority supports it?
4. Will you review equipment vendor installation documents?
5. How will you identify qualified improvement property and confirm who made each improvement?
6. Will the asset list support partial dispositions when a suite is rebuilt?
7. Who signs the report, and will you answer questions if the return is examined?

## Questions people also ask

### Is a medical office building 39-year property?

Yes, as nonresidential real property. The site improvements, equipment and certain interior improvements a study identifies may have shorter lives.

### Are dedicated circuits for medical equipment short-life property?

They may be. The IRS guide's functional allocation treats circuits supplying dedicated equipment used in the business differently from those serving building services, and the study should document the allocation.

### Are tenant improvements in a medical suite 15-year property?

Interior improvements made by the taxpayer after the building was first placed in service may be qualified improvement property, which is 15-year property, unless they are enlargements, elevators or structural framework.

### Can a practice that leases its space benefit from a study?

A tenant that paid for its build-out and equipment depreciates those costs, and a study of the build-out can classify them. The building owner studies the shell, site and the improvements it funded.

### Does bonus depreciation apply?

To qualified property with a recovery period of 20 years or less, including qualified improvement property, at 100 percent for qualified property acquired after January 19, 2025.

## Sources

- https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapter 4; Appendix B, asset classes 00.11, 00.12, 00.3 and 57.0.
- https://www.law.cornell.edu/cfr/text/26/1.48-1 — 26 C.F.R. §1.48-1(c) and (e)(2), tangible personal property and structural components.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 4, 6.C.5 and 8.A.
- https://www.leagle.com/decision/1997130109btc211129 — Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997).
- https://www.law.cornell.edu/uscode/text/26/168 — 26 U.S.C. §168(e)(3)(E)(vii), (e)(6) and (i)(8).
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance.
- https://www.law.cornell.edu/cfr/text/26/1.168%28i%29-8 — 26 C.F.R. §1.168(i)-8, partial disposition election.

## Related reading

- [What a cost segregation study does](/articles/what-a-cost-segregation-study-does)
- [Qualified improvement property and cost segregation](/articles/qualified-improvement-property)
- [Cost segregation after a renovation: improvements and partial dispositions](/articles/renovations-improvements-and-partial-dispositions)
- [Cost segregation red flags: what examiners and reviewers look for](/articles/cost-segregation-red-flags)
- [How to hire a cost segregation practitioner](/articles/how-to-hire-a-cost-segregation-practitioner)

To find a practitioner, search the [NBCSS directory](/directory) or browse [cost segregation specialists by state](/cost-segregation-specialists).

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Published: 2026-10-01 · Last content change: 2026-10-01
Not professional advice: general educational information from the National Board of Cost Segregation Specialist (NBCSS); not accounting, tax, legal, financial, investment or engineering advice. Verify with a licensed CPA, enrolled agent, attorney or other qualified adviser before acting.