Original August 20, 2023; Updated May 17, 2026
Dr. Steve Suh
Ownership in ambulatory surgery centers (ASCs) by surgeons and procedure-oriented physicians has continued to expand over the past two decades. Common specialties utilizing ASCs include ophthalmology, gastroenterology, plastic surgery, orthopedic surgery, otolaryngology, urology, podiatry, dermatology, and pain medicine. Even though physicians may regularly perform procedures at their ASC, many do not “materially participate” in the management or operation of the facility as defined by the IRS passive activity rules.
As a result, income reported on a Schedule K-1 from an ASC is often classified as passive income for tax purposes. Importantly, however, this passive income may still be taxed at the physician’s ordinary federal income tax rate.
One increasingly common strategy used by physicians, family offices, private real estate investors, and institutional alternative investment groups involves investing in tax-efficient real estate syndications that generate depreciation-related passive losses. These passive losses may potentially offset passive gains from ASCs and other passive investments, subject to IRS rules and limitations.
Many commercial real estate syndications — including multifamily, self-storage, industrial, manufactured housing, medical office, and build-to-rent developments — utilize cost segregation studies. A cost segregation study identifies components of a property that may be depreciated over shorter schedules (5, 7, or 15 years) instead of the standard 27.5- or 39-year schedules associated with real estate. This can accelerate depreciation and create significant early passive losses for investors.
Recent tax legislation has allowed varying levels of bonus depreciation depending on the tax year and prevailing law at that time. Because depreciation rules continue to evolve legislatively, investors should consult their CPA or tax advisor regarding the percentage of bonus depreciation available in the applicable year.
When investing in a real estate syndication, the investor typically receives a Schedule K-1 summarizing distributions, taxable income, and passive gains or losses. The lines associated with “Ordinary business income (loss)” and “Net rental real estate income (loss)” often determine whether the investor has generated a passive loss that may potentially offset passive passive gains from other sources.
Importantly, these passive losses are generally most valuable to investors who already receive passive income from:
- ambulatory surgery centers
- imaging centers
- dialysis centers
- infusion centers
- passive real estate holdings
- future syndication exits
- certain partnership investments.
Unused passive losses are generally not lost. Instead, they may often be carried forward and applied against future passive gains, subject to IRS passive activity, basis, and at-risk limitations.
Investors should understand that passive losses are subject to several important IRS rules, including:
- basis limitations
- at-risk limitations
- passive activity loss rules.
Proper partnership basis calculations and debt allocations are important aspects of syndicated real estate investing. Investors should work closely with qualified tax professionals familiar with partnership taxation and alternative investments.
For example, consider a physician who receives $30,000 of passive K-1 income from an ASC. That same year, the physician invests $100,000 into a commercial real estate syndication utilizing cost segregation and bonus depreciation. The following year, the investor receives a K-1 showing an $80,000 passive loss generated primarily through depreciation.
In this scenario, the physician may potentially use $30,000 of that passive loss to offset the passive ASC income, subject to basis and passive activity rules. If the physician is in a 35% marginal federal tax bracket, this could potentially reduce federal taxes by approximately $10,500. The unused passive losses may potentially carry forward to offset future passive gains from ASC ownership, future syndication income, or gains generated from future real estate dispositions.
Forward-thinking investors should also understand depreciation recapture and long-term capital gain treatment when properties are eventually sold. While depreciation-related tax benefits may create meaningful early passive losses, portions of these benefits may later be recaptured upon sale of the property. However, because many investors continue reinvesting into future syndications, passive losses and future passive gains may potentially be managed strategically over long periods of time.
Importantly, these strategies are not fringe or abusive “tax shelters.” Rather, they represent mainstream partnership-taxation concepts widely utilized throughout:
- commercial real estate syndications
- family offices
- private equity real estate firms
- institutional real estate funds
- alternative investment platforms
- energy and infrastructure partnerships.
The key is proper structuring, documentation, realistic expectations, and coordination with experienced legal, accounting, and tax advisors.
Some investors are also exploring similar tax-oriented structures within certain oil & gas direct participation programs (DPPs), which may provide intangible drilling cost (IDC) deductions and depletion-related tax benefits. However, these investments involve materially different risks, including commodity-price volatility and operational drilling risk, and should be evaluated separately.
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Steven Suh, MD is an ophthalmologist and co-creator of Merge Medical. He is also one of the founders of Left Field Investors, an educational site and networking community of like-minded individuals interested in creating financial freedom through passively investing in real assets that generate real cash flow. After owning a few small residential rentals and seeing that it was not easily scalable, he transitioned to the world of passive investing in commercial real estate syndications. He enjoys learning and talking about real estate and hopes to educate more people about the merits of passive investing. You can contact him at steve@leftfieldinvestors.com.
