Cost Segregation Considerations for Healthcare Facilities

The ongoing shift toward outpatient care and specialized treatment environments has accelerated investment in healthcare-related real estate, particularly medical office buildings (MOBs) and veterinary facilities. These assets are increasingly defined by complex, tenant-specific buildouts designed to support clinical operations.

This level of customization not only differentiates healthcare facilities from traditional office properties but also creates meaningful tax planning opportunities. In particular, cost segregation studies can identify and reclassify qualifying components, allowing taxpayers to accelerate depreciation and improve near-term cash flow.

Key Takeaways

• Cost segregation studies typically reclassify 20% to 40% of a healthcare facility's assets into 5-, 7-, or 15-year property, accelerating depreciation deductions.
• Medical office buildings and veterinary facilities qualify as strong cost segregation candidates because their tenant buildouts include specialized MEP systems, medical gas, imaging infrastructure, and dedicated equipment connections.
• Cost segregation works alongside Qualified Improvement Property (QIP), the tangible property regulations, and IRC Sec. 179D to expand the total tax benefit during renovations and retrofits.
• Healthcare property owners should evaluate cost segregation during construction, acquisition, or significant renovation to capture the full benefit early in the asset's lifecycle.

Why Healthcare Facilities Are Strong Candidates for Cost Segregation Studies

Healthcare facilities are typically designed around specialized clinical functions, requiring extensive mechanical, electrical, and plumbing (MEP) systems, as well as dedicated equipment infrastructure. These features often go well beyond standard office specifications.

An engineering-based cost segregation study can identify and reclassify these components into shorter-lived asset categories, allowing taxpayers to accelerate depreciation deductions and defer federal income taxes.

In many cases, studies commonly identify 20% to 40% of a healthcare facility’s assets may be reclassified into 5-, 7-, or 15-year property, depending on the scope of the buildout and the level of specialization.

This front-loading of depreciation can significantly enhance near-term cash flow, particularly when combined with bonus depreciation where applicable.

What Assets Qualify for Reclassification in Healthcare Facilities?

Medical office environments frequently include a range of components that may qualify as personal property or land improvements rather than structural building elements:

Examples of commonly segregated assets include:

• Specialized medical equipment and related electrical and plumbing connections
• Medical gas systems and scrub sinks
• Imaging-related infrastructure, such as MRI shielding and chillers
• Nurse call systems and dedicated wiring
• Dedicated electrical systems for diagnostic and surgical equipment
• Exam and break room cabinetry, millwork, and decorative finishes
• Flooring, wall coverings, and specialty lighting
• Security systems and fire protection equipment
• Kennels and boarding infrastructure (veterinary facilities)

Exterior site improvements, such as parking areas, sidewalks, and landscaping, may also be classified as 15-year land improvements.

The high degree of tenant customization, particularly in imaging centers, surgical suites, and specialist facilities, drives a substantial portion of these reclassifications.

How Does Cost Segregation Interact With QIP, Sec. 179D, and Repair Regulations?

Cost segregation studies for healthcare facilities can also support additional tax strategies, particularly in renovation or retrofit scenarios.

For example:

• Qualified Improvement Property (QIP): Interior improvements to nonresidential buildings may qualify for accelerated depreciation and bonus treatment.
• Tangible Property Regulations: Partial asset dispositions and repair analyses may be applied during renovations.
• Section 179D: Energy-efficient building components may qualify for deductions in certain cases.

When properly coordinated, these provisions can significantly enhance the overall tax benefit associated with a project.

Illustrative Results: Imaging Center and Veterinary Facility

The impact of cost segregation in healthcare facilities can be substantial, particularly for newly constructed or recently renovated properties.

For instance, an imaging center renovation with a depreciable basis of approximately $2.1M resulted in over 30% of assets being reclassified to 5-year property and more than 60% treated as Qualified Improvement Property, generating first-year tax savings exceeding $400,000.

Similarly, a newly constructed veterinary facility with a basis of approximately $2.9 million achieved over $350,000 in first-year tax savings through the reclassification of personal property and land improvements.

When to Consider a Cost Segregation Study

As healthcare delivery continues to evolve toward outpatient and specialized care settings, investment in medical office and veterinary facilities is expected to remain strong. From a tax perspective, these properties present a compelling case for cost segregation due to their technical complexity and high level of customization.

Property owners, developers, and their advisors should evaluate cost segregation early in the lifecycle of these assets, particularly when construction, acquisition, or significant renovation activity is involved. No matter where you are in the real estate life cycle, an EisnerAmper cost segregation study can provide immediate tax benefits while supporting broader tax planning strategies.