Selling a Medical Practice: The Complete Tax Guide

The first — and most important — structural question in any medical practice sale is whether it will be structured as an asset sale or a stock (equity) sale. This single decision determines how every dollar of the purchase price is taxed, and the difference can be $100,000 to $500,000+ in tax liability on a typical physician practice sale.

In an asset sale, the practice sells its individual assets — equipment, patient records, accounts receivable, non-compete agreements, and goodwill. Each asset category has its own tax treatment. In a stock sale, the owner sells their ownership interest (stock or membership units) in the entity itself. The buyer takes over the entity with all its assets and liabilities.

The majority of a well-structured practice sale should be taxed at long-term capital gains rates rather than ordinary income rates. For 2026, the long-term capital gains rates are:

In addition to the base capital gains rates, high-income taxpayers pay the 3.8% Net Investment Income Tax (NIIT) on investment income (including capital gains) when modified adjusted gross income exceeds $200,000 (single) or $250,000 (MFJ). For most physicians selling a practice, the effective capital gains rate is 23.8% (20% + 3.8% NIIT).

Compare this to ordinary income rates of up to 37% — the difference between 23.8% and 37% on a $1 million gain is $132,000 in additional taxes. This is why maximizing the capital gains allocation in a practice sale is so critical.

Goodwill is typically the largest component of a medical practice sale. For many physician practices, goodwill represents 50-80% of the total sale price. How you classify and allocate goodwill has enormous tax implications.

There are two types of goodwill: personal goodwill (attributable to the individual physician) and practice/enterprise goodwill (attributable to the business entity). The distinction matters most for C-Corp practices, because personal goodwill belongs to the physician — not the corporation — and can be sold directly by the physician in a separate transaction, bypassing the corporate-level tax entirely.

Under IRC Section 453, when you receive at least one payment after the tax year of the sale, you can report the gain proportionally as payments are received — rather than recognizing the entire gain in the year of sale. This is called an installment sale.

For physician practice sales, installment sales are particularly powerful because they can: (1) keep you in lower capital gains brackets each year, (2) reduce or eliminate the 3.8% NIIT in years when your MAGI falls below the threshold, (3) align income recognition with retirement years when other income is lower, and (4) provide a steady income stream during the transition to retirement.

Non-compete agreements (also called covenants not to compete) are a standard component of medical practice sales. The buyer pays the seller to agree not to practice medicine within a certain geographic area for a specified period (typically 2-5 years and 10-25 miles). The tax treatment is straightforward and unfavorable for the seller: non-compete payments are ordinary income, taxed at rates up to 37% federal plus state income tax.

Contrast this with goodwill, which is taxed at 20% + 3.8% NIIT = 23.8%. The difference between 37% and 23.8% on a $500,000 allocation is $66,000. This creates a fundamental tension in practice sale negotiations: buyers want to allocate more to non-compete (because they can amortize it over 15 years as a Section 197 intangible), while sellers want to allocate more to goodwill (for the lower capital gains rate).

The physicians who pay the least tax on practice sales are the ones who plan 3-5 years in advance. Succession planning is not just about finding a buyer — it is about structuring your entity, compensation, employment agreements, and asset allocation to minimize the tax impact of the eventual sale.