The final episode of the cost segregation series. Wes covers the grouping election, the one tax election that determines whether building losses can offset practice income or get suspended indefinitely. Includes the self-rental asymmetry, how to execute the election, five pros, six cons, and when to make it.

Key Topics Covered

1. The Self-Rental Asymmetry

• Rental income from a building you operate in a non-passive (taxable)
• Rental losses from that same building are passive (trapped)
• Result: a $300,000 year-one cost segregation loss cannot reduce your W2 or K-1; it is suspended until the building has future taxable profit

2. What the Grouping Election Does

• IRC Section 1.469-4(f): elect to treat the building LLC and practice S corp as one economic unit
• Losses in the building LLC that become non-passive can now offset W2 and K-1 income directly
• Example: $400,000 building loss reduces $1M of practice income to $600,000, saving $150,000–$200,000 in taxes in year one

3. Qualification and Timing

• Qualifies when: same ownership percentage in building and practice, dentist is the only tenant, same location
• Must be elected on the original tax return for the first year of building ownership; it cannot be made retroactively
• CPA must attach a disclosure statement identifying the grouped activities alongside Form 8582

4. Five Pros of the Grouping Election

• Loss utilization: building losses offset W2 and K-1 in the year they are generated
• Cost segregation amplification: first-year bonus depreciation becomes immediately usable instead of frozen
• Fixes the asymmetry: losses become non-passive, matching the non-passive character of building income
• Simpler participation: one shared material participation test for both activities
• Predictable: no annual suspended loss ledger to manage

5. Six Cons of the Grouping Election

• One-way door: binding in all future years; can only be undone by a material change in facts (e.g., selling the practice)
• Partial sale complexity: selling the building without the practice creates complicated suspended loss treatment
• Forfeits passive shelter: building losses can no longer offset passive income from outside rental properties
• DSO or partner disruption: any equity sale that misaligns building and practice ownership breaks the grouping
• 1031 exchange complications: a grouped building is harder to roll into a like-kind exchange
• Semi-retirement trap: when practice income drops, the non-passive characterization no longer helps and can hurt

6. Best-Case Scenario

• Dentist buys practice without building, grows income into the top brackets over 5+ years, then buys the building
• Commissions cost seg study in year one of building ownership, makes the grouping election, and offsets peak practice income
• Worst case: buying practice and building simultaneously at low income — better to wait for a higher-income year

7. When to Make and When to Skip the Election

Make it when:

• Buying the building with a long-term operating plan
• High practice income and a cost seg study ready to deploy
• No near-term plans to sell, partner, or transition ownership

Skip or defer when:

• Income is low, preserve deductions for a higher-bracket year
• You own other passive real estate and need building losses to stay passive
• A DSO transaction or partnership is within the next few years