The tax consequences of selling a dental practice can reduce your net proceeds by 30–45% if you aren't prepared. Most dentists focus on the headline sale price and overlook the fact that how the purchase price is allocated — across equipment, goodwill, a covenant not to compete, and real estate — determines which tax rates apply to each dollar.
The difference between a well-planned sale and an unplanned one can be $100,000 to $300,000 in tax savings on a $1–2 million transaction. Planning should start 2–3 years before you list.
Asset Sale vs. Stock Sale
Most dental practice sales are structured as asset sales, meaning the buyer purchases individual assets — equipment, patient records, goodwill, the practice name — rather than buying your entity (stock or membership interest). This distinction matters enormously for taxes.
In an asset sale, the buyer gets a "stepped-up" basis in each asset, allowing them to depreciate or amortize everything from scratch. Buyers prefer this because it generates tax deductions for them. For the seller, however, each category of assets is taxed at different rates.
In a stock sale (or membership interest sale for LLCs), you sell the entity itself. The entire gain is generally treated as long-term capital gains if you've held the interest for more than one year. This is typically better for the seller — but buyers resist it because they inherit the entity's existing tax basis and any hidden liabilities.
Purchase Price Allocation: Where the Tax Impact Lives
In an asset sale, the total purchase price must be allocated across specific asset categories under IRC Section 1060. Both buyer and seller report the same allocation on Form 8594. Each category has different tax treatment for the seller:
| Asset Category | Tax Treatment for Seller | Typical Rate |
|---|---|---|
| Equipment & instruments | Depreciation recapture (ordinary income) + capital gain on excess | Up to 37% |
| Goodwill | Long-term capital gain | 20% (+ 3.8% NIIT) |
| Covenant not to compete | Ordinary income | Up to 37% |
| Patient records / charts | Long-term capital gain (self-created: ordinary in some cases) | 20–37% |
| Real estate | Section 1250 recapture (25%) + capital gain on excess | 20–25% |
| Supplies & inventory | Ordinary income | Up to 37% |
The seller wants maximum allocation to goodwill (taxed at the lower capital gains rate). The buyer wants more allocated to equipment and the covenant not to compete (which they can depreciate or amortize faster). This is a direct negotiation point.
Example: On a $1.5 million practice sale, shifting $200,000 from a covenant not to compete (taxed at 37%) to goodwill (taxed at 20%) saves the seller roughly $34,000 in federal taxes. The allocation is negotiable — and it should be negotiated before closing, not after.
Depreciation Recapture
If you've claimed Section 179 deductions or bonus depreciation on equipment over the years, those deductions get "recaptured" at sale. The IRS treats the gain attributable to prior depreciation as ordinary income, taxed at your marginal rate (up to 37%).
For example: you bought a CBCT scanner for $150,000 and fully expensed it under Section 179. Your adjusted basis is now $0. If the scanner is allocated $40,000 in the sale, that entire $40,000 is depreciation recapture — taxed as ordinary income.
This doesn't mean Section 179 was a bad idea. The time value of the earlier deduction still creates a net benefit. But you need to anticipate the recapture when modeling your after-tax proceeds from the sale.
Capital Gains Treatment
Gain allocated to goodwill and going-concern value qualifies for long-term capital gains treatment — currently 20% for high earners, plus the 3.8% Net Investment Income Tax (NIIT) if your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).
For most dentists selling a mature practice, goodwill represents the largest single component — often 50–70% of the total purchase price. Protecting this allocation is the single most important tax move in the sale.
Installment Sale Option
An installment sale under IRC Section 453 allows you to spread the gain recognition over the payment period. Instead of recognizing the entire gain in the year of sale, you report gain proportionally as you receive payments.
This is particularly useful if the sale would push you into the highest tax bracket in a single year. By receiving payments over 3–5 years, you may keep more income in lower brackets and reduce or avoid the 3.8% NIIT in certain years.
- Pros: Lower marginal rates, deferred tax payments, steady income stream
- Cons: Buyer credit risk, interest income is ordinary, depreciation recapture is recognized in year one regardless
Earnout Structures
In an earnout, a portion of the purchase price is contingent on the practice hitting certain performance targets after closing — typically revenue or patient retention metrics over 1–3 years. This is common when the buyer wants the selling dentist to stay on during a transition period.
Tax treatment of earnouts depends on structure. If treated as additional purchase price, the gain is generally capital. If structured as compensation for services during the transition, it's ordinary income. The distinction matters: 17 percentage points of difference between capital gains and ordinary rates.
Planning to sell your practice in the next 2–5 years? We'll model your after-tax proceeds under different sale structures — before you engage a broker.
Get a Free Sale Analysis →Pre-Sale Planning Strategies (Start 2–3 Years Early)
The biggest tax savings come from decisions made years before the sale, not at the closing table. Here's what to focus on:
- Maximize retirement contributions. Fund a defined benefit plan aggressively in the 2–3 years before sale. This shelters income at the highest marginal rates and builds tax-free retirement wealth.
- Evaluate your entity structure. If you're a C-Corp, consider converting to an S-Corp at least 5 years before sale to avoid the built-in gains tax. If you're already an S-Corp or LLC, confirm the structure is optimized.
- Accelerate deductions now. Take available deductions in high-income years before the sale, when your marginal rate is highest.
- Separate real estate. If you own the building, hold it in a separate LLC. This lets you sell the practice and retain the real estate as a rental asset — or sell it separately via a 1031 exchange.
- Clean up depreciation schedules. Ensure your asset records are accurate so depreciation recapture calculations at sale are correct.
- Consider Qualified Opportunity Zones. If you reinvest capital gains from the sale into a QOZ fund within 180 days, you can defer and potentially reduce the gain.
The dentists who net the most from a practice sale aren't the ones with the highest sale price — they're the ones whose tax strategy was in place well before the buyer showed up.