When selling a dental, medical, chiropractic or veterinary practice, the real and personal property are eligible for 1031 exchange tax deferral treatment given both the real and personal property are replaced. There could also be a partial 1031 exchange of only the real property where capital gains tax is triggered and tax on the personal property sale needs to be paid. There are many reasons to relocate or sell a practice and the tax considerations should be evaluated with your CPA.
The components of the sale are itemized into groups of real, tangible and intangible personal property. The original asset price plus the improvements less the depreciation taken determines the adjusted basis. The sales price less the adjusted basis and selling expenses determines the gain. A 25% recaptured depreciation is assessed on the aggregate depreciation taken over the years. As long as the sales value of the new real and personal property are equal to or greater than the old property, 100% of the capital gain and recaptured depreciation can be deferred in a 1031 exchange.
Intangible personal property includes:
- trade names and trademarks;
- customer lists;
- marketing data.
Personal property eligible for 1031 consideration is outlined in thirteen General Asset Classes. The replacement tangible and intangible personal property must be like kind or class to the property being sold to qualify for the 1031 exchange tax deferral on that group or asset.
Four primary 1031 exchange strategies:
- forward - the old property is sold before the purchase of the new property.
- reverse - the new property is acquired before the sale of the old property.
- build to suit or improvement - new property is improved either before or after the old property is sold.
- leasehold improvement - property already owned is improved either before or after the old property is sold.
Your CPA will determine whether or not there is a gain and depending upon the outcome will determine whether a 1031 exchange makes sense.
Selling your practice, consider:
Rick Dilwilth specializing in dental and medical practices;
David Greene specializing in dental, medical, chiropractic and veterinary practice sales.