StructuredSales.org
StructuredSales.org
Physician practice acquisitions are running at a record pace in 2026. Private equity-backed physician management organizations (PMOs), hospital health systems, and large physician groups are all actively acquiring practices — and the valuations reflect it. But for the selling physician, a large acquisition price creates an equally large tax liability. A practice selling for $3M–$8M can generate a lump-sum tax bill of $700,000 to $2M+, depending on the state and the allocation of purchase price.
A structured installment sale under IRC §453 allows a physician-seller to defer the recognition of capital gain — primarily goodwill — across multiple years. By spreading income across a 10-to-20-year payment stream guaranteed by a rated life insurance company, most physicians can reduce their effective combined tax rate by 8–15 percentage points while receiving a secure, predictable income stream in retirement.
The physician tax problem in one line: A physician selling a $4M practice with $3.5M in capital gain will owe approximately $832,000 in combined federal taxes on a lump-sum close (20% LTCG + 3.8% NIIT) — before any state taxes. The structured installment method can reduce that bill significantly.
Medical practices — particularly those built around the reputation and relationships of one or a small number of physicians — carry substantial goodwill value. Goodwill is classified as a capital asset and taxed at long-term capital gains rates when sold, making it uniquely well-suited for installment deferral.
The IRS and courts have consistently recognized personal goodwill — the value attributable to an individual physician's skills, reputation, and patient relationships — as an asset belonging to the individual, not the practice entity. In an asset sale, personal goodwill can be sold directly by the physician to the buyer at capital gains rates, separate from the entity's sale. This is especially important for C-corporation practices, where entity-level goodwill would trigger double taxation.
| Asset | Typical % of Purchase Price | Tax Treatment |
|---|---|---|
| Medical equipment | 5–15% | §1245 recapture — ordinary income |
| Non-compete agreement | 5–10% | Ordinary income to seller |
| Patient charts / records | 5–10% | Capital gains |
| Workforce in place | 2–5% | Capital gains |
| Practice goodwill | 30–50% | Long-term capital gains |
| Personal goodwill | 20–40% | Long-term capital gains (directly to physician) |
A well-negotiated and properly documented allocation maximizes the goodwill component (capital gains) and minimizes the non-compete and ordinary-income components. A qualified business valuation supporting the personal goodwill allocation can save a physician hundreds of thousands of dollars in tax.
Facts: Two-physician internal medicine practice (S-corporation), Ohio (state income tax ~3.75% on most income). Sale price: $4,000,000. Allocation: $300,000 equipment (fully depreciated, recaptured as ordinary income), $500,000 non-compete (ordinary income), $3,200,000 goodwill (capital gain). Adjusted basis in goodwill: $0. Structured sale on goodwill only: 5% interest, 10-year term. Annual goodwill payment: approx. $414,600/year per practice, split 50/50 between two physicians.
| Scenario (per physician, 50% share) | Lump Sum | Structured (10yr) |
|---|---|---|
| Recapture/non-compete tax (ordinary) | $148,000 (37%) | $148,000 (year 1, not deferrable) |
| Goodwill gain — federal LTCG (20%) | $320,000 | $240,000 (15%) |
| NIIT (3.8%) | $60,800 | $0 (under threshold) |
| Ohio income tax | $59,850 (~3.75%) | $44,888 |
| Total per physician | $588,650 | $432,888 |
| Savings per physician | $155,762 |
Buyer cooperation required. The structured installment sale requires the buyer to cooperate in assigning their payment obligation to a qualified life insurance company at close. Most sophisticated buyers (hospital systems, PE-backed PMOs) are familiar with this structure and will accommodate it, as it does not affect their net purchase price. The assignment must be arranged before or at closing — it cannot be added retroactively after the seller receives a payment.
Employment agreements are separate. Many physician acquisitions include a multi-year employment or professional services agreement where the physician continues to practice under the acquirer. Compensation under this agreement is ordinary income and cannot be structured as an installment sale. The structured installment sale applies only to the purchase price for the practice assets.
Partner equity buyouts. When one physician buys out another partner's interest in a multi-physician group before a third-party sale, similar installment sale rules apply. The installment method can be used to spread gain from an internal partnership interest purchase, though the mechanics differ from a direct asset sale to an outside buyer.
Both personal goodwill (tied to the physician's reputation and patient relationships) and practice goodwill (the brand, systems, and referral network that exist independent of any one doctor) are taxed at long-term capital gains rates when sold as part of an asset transaction. The distinction matters most in C-corporation sales, where enterprise goodwill owned by the corporation triggers double taxation; personal goodwill paid directly to the physician avoids the corporate-level tax.
Yes. Hospital and health system acquisitions of physician practices are often asset purchases. The same IRC §453 mechanics apply: the buyer's payment obligation is assigned to a rated life insurer, which funds a guaranteed annuity to the physician-seller. Note that compensation for future services (employment agreements) is separate from and not deferrable as an installment sale.
Valuations vary widely by specialty. Primary care practices typically trade at 4x–7x EBITDA for hospital acquisitions and 5x–8x for PE-backed physician group acquisitions. Specialty practices (cardiology, orthopedics, gastroenterology) can command 6x–12x. A practice with $1M in annual EBITDA might sell for $5M–$8M in the current market.
Medical equipment (diagnostic machines, exam tables, EMR hardware) that has been depreciated is subject to §1245 recapture, taxed as ordinary income up to the amount of prior depreciation. This recapture is recognized in full in the year of sale — it cannot be deferred under the installment method. Only the remaining capital gain (primarily goodwill) can be spread across years.
For tax purposes on a sale, S-corporations and partnerships are generally preferable to C-corporations because gain passes through to owners at capital gains rates without double taxation. C-corporation practice sales face corporate-level tax plus shareholder-level tax on distributions. The personal goodwill strategy can partially mitigate this for C-corp sellers. Consult a healthcare M&A attorney and CPA before any restructuring in anticipation of a sale.
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