Selling a veterinary practice: the clinic, the building and the tax

Two assets, two buyers' questions

Most practice owners who bought or built their hospital put the real estate in a separate LLC and charged the practice rent. That structure decides the shape of the sale. The consolidator wants the practice: patient relationships, staff, equipment, the drug formulary. It may or may not want the building. Many prefer to lease it, because buying real estate ties up capital they would rather spend on the next acquisition. So you face two separate tax events, or one sale and one lease, each with its own rate and its own deferral options.

Getting the rent right matters before you sell. A consolidator values the practice on earnings after market rent. If you have been charging your own practice below-market rent, the practice looks more profitable and the building worth less; a new lease at market rent shifts value from goodwill to real estate, which changes both the rate you pay and the deferral tools available.

How the practice side is taxed

• Goodwill is usually most of the price and is long-term capital gain if held over a year. In an S corporation or LLC it passes through as capital gain; in an older C corporation it is taxed twice, which is why personal goodwill planning matters for vets with that entity.
• Equipment (digital radiography, ultrasound, anesthesia machines, surgical lasers, in-house lab analyzers) was usually expensed under Section 179 or bonus depreciation. The buyer's price for it, up to original cost, is ordinary recapture under IRC 1245 and is taxed in the year of sale even if you carry a note (IRC 453(i)).
• Drug, vaccine and food inventory is not a capital asset (IRC 1221(a)(1)) and cannot be reported on the installment method (IRC 453(b)(2)(B)). Consolidators usually buy it at cost, so the taxable gain is small, but the dollars are ordinary.
• Non-compete payments are ordinary income to you; the buyer amortizes them over 15 years (IRC 197).

The allocation among these classes is negotiated and reported by both sides on Form 8594; our purchase price allocation guide covers the tug-of-war.

How the building is taxed if you sell it

Selling the hospital building produces two layers of federal gain. Depreciation you took on the building (straight line over 39 years for a commercial building) comes back as unrecaptured Section 1250 gain, taxed at up to 25% (IRC 1(h)(1)(E), 2026). Appreciation above original cost is Section 1231 gain, taxed like long-term capital gain at up to 20% above $545,500 of taxable income for single filers (Rev. Proc. 2025-32, 2026). Equipment bolted into the building, if a cost segregation study broke it out, is 1245 property and comes back as ordinary recapture.

The net investment income tax deserves a look. Rental income is normally investment income, but when you rent the building to a practice in which you materially participate, the self-rental rule treats it as nonpassive, and Treas. Reg. 1.1411-4(g)(6)(ii) then treats the gain on selling it as trade or business gain outside the 3.8% tax (IRC 1411, 2026). Our example assumes that applies. If the building was leased to an unrelated tenant, or you stopped practicing years ago, expect the 3.8% to apply. See capital gains tax on commercial property and Section 1231 gain.

Sell the building, lease it, or exchange it

Because the real estate is separate, it has options the practice does not:

• Lease it to the consolidator. No sale, no tax now, and you keep rental income. Insist on a long initial term, rent escalators and the corporate parent on the lease, not just a local subsidiary; see sale-leaseback for the trade-offs when the buyer later wants to own.
• Sell it into a 1031 exchange. Real property held for investment or business use qualifies; goodwill and equipment do not (IRC 1031 has been real-property-only since 2018).
• Sell it on a note. An installment sale spreads the 1231 gain over the payments, but the 1250 portion is taxed first under Treas. Reg. 1.453-12, and a seller note to a corporate buyer is rare.

Worked example: a Washington veterinarian

Washington has no income tax but imposes a capital gains excise of 7% on long-term gains above an annual deduction ($278,000 for 2025, indexed for inflation), plus 2.9% on taxable gains over $1 million from 2025 (RCW 82.87.040). Real estate is exempt (RCW 82.87.050). That makes the practice-versus-building split unusually visible.

A single veterinarian with $200,000 of other income sells the practice to a consolidator for $2,400,000 of goodwill gain and $150,000 of equipment recapture. The sale adds $706,874 of tax, including $181,078 of Washington excise on the goodwill. Washington does not tax the recapture, which is ordinary income under federal law. Sold separately, the building with $300,000 of prior depreciation and $500,000 of appreciation adds $173,080, and Washington's share is $0 because real estate is exempt from the excise.

Now suppose the consolidator holds back $600,000 of goodwill as an earn-out paid in 2027. The total drops to $667,200, $39,674 less, mainly because Washington allows a fresh deduction each year and less of the gain lands above $1 million in any one year. Washington follows the federal installment method for sales on or after January 1, 2022 (WAC 458-20-301). See Washington capital gains.

Earn-outs and rollover equity in consolidator deals

Consolidators commonly pay 70% to 90% at closing and tie the rest to post-sale revenue or doctor retention, or ask you to roll part of the price into equity in the platform. Treat those ranges as illustrative of 2026 offers, not a rule. An earn-out with a stated maximum is reported under the contingent payment rules of Treas. Reg. 15a.453-1(c): basis is recovered against the maximum price and gain is taxed as payments arrive; see earn-out and contingent payment installment sale. Rollover equity can be deferred under IRC 721 or 351 when the transaction is drafted that way. Veterinary practices are a health-services business for the QSBS rules (IRC 1202(e)(3)(A)), so expect no Section 1202 exclusion on clinic stock.

Before you take a consolidator's letter of intent

1. Set market rent between your real estate LLC and the practice, in writing, at least a year before the sale.
2. Get an appraisal of the building separate from the practice valuation.
3. Inventory equipment with original cost and basis so the recapture is sized before the allocation is negotiated.
4. Decide whether you want to keep the building as a rental, sell it, or exchange it, and model each with the practice sale in the same year and in different years.

For a side-by-side of every option on your numbers, Get the Big Sale Tax Analysis.

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