Taxes When Selling a Medical Practice: Private Equity, Hospitals and Physician Buyers

Asset sale vs. equity sale

Most buyers prefer to buy assets, because they can depreciate and amortize the purchase price. Sellers often prefer selling equity for capital gain treatment. In an asset sale, both sides report the price allocation on Form 8594 using the residual method, and each category is taxed differently:

• Equipment and furniture: gain up to prior depreciation is ordinary income.
• Accounts receivable: ordinary income for a cash-basis practice.
• Goodwill: generally long-term capital gain.
• Non-compete payments: ordinary income, and not subject to capital gain rates.
• Consulting or employment payments: wages or self-employment income.

Personal vs. enterprise goodwill

Much of a medical practice's value comes from the physician's own relationships and reputation. When there is no non-compete or employment agreement transferring that value to the practice, courts have recognized it as personal goodwill owned by the physician. Selling personal goodwill directly can produce capital gain and avoid a second tax in C corporations or built-in gains in S corporations. It requires careful documentation and a valuation.

Private equity transactions

• Rollover equity: part of the price is paid in equity of the buyer's platform, which can often be structured as tax-deferred.
• Earnouts: contingent payments that may be taxed when received, often under installment sale rules.
• Compensation reset: physicians usually accept lower ongoing pay in exchange for the purchase price, which converts future ordinary income into present capital gain.

Hospital acquisitions

Hospitals typically buy hard assets and employ the physicians. Purchase prices are often limited by fair market value rules, so more of the economics show up in employment compensation. Planning focuses on the employment agreement, retirement plan transitions and what happens to practice real estate.

Reducing the tax

• Installment sales spread gain across years and can keep income out of the highest brackets or state surtaxes.
• The 2026 20% capital gains rate applies above $545,500 (single) or $613,700 (joint), plus the 3.8% net investment income tax in many cases.
• Charitable remainder trusts or donor-advised funds funded before a sale can offset part of the gain.
• Changing state residency well before closing can reduce state tax, but state tax authorities review these moves closely.
• The qualified small business stock exclusion generally does not apply to health care businesses.

Checklist: three years before a sale

1. Clean financial statements and normalize owner compensation.
2. Review entity structure and any built-in gains exposure.
3. Separate practice real estate into its own entity.
4. Document personal goodwill and existing restrictive covenants.
5. Model after-tax proceeds under several deal structures.
6. Coordinate retirement plan termination or merger.
7. Update estate planning, including gifting interests before value is fixed.

This article is for general educational purposes and is not tax, legal or investment advice. Tax law changes often and its application depends on your facts. Figures reflect 2026 rules as published by the sources listed above. Consult a qualified professional before acting. See our editorial policy.