| A dental practice is sold for a variety of reasons: | | | | a Section 1031 tax free exchange. |
| retirement, moving to another city, or even because of | | | | Deferring taxes through a tax-free exchange |
| health issues. Regardless of the reason, it is critical to | | | | Section 1031 of the Internal Revenue Code has been in |
| consider the tax ramifications of the sale. Depending | | | | existence since the early part of the 20th century. If |
| on the type of assets sold, the seller can pay federal | | | | you purchase "like-kind" property within six months of |
| and state taxes of up to 40% of the gain. For | | | | the sale of the practice, your taxes will be deferred, as |
| example, a majority, if not the entire amount of the | | | | long as the various rules are satisfied. There are two |
| equipment sold is likely to be taxable at the highest | | | | time periods involved. The first one, called the |
| rates for both individual and corporate owners. This is | | | | identification period, requires the selling dentist to |
| because most dental equipment is written off in the | | | | identify one to three replacement properties within 45 |
| year of purchase or depreciated over a 5 to 7 year | | | | days. The second period involves the actual purchase |
| period. Therefore, there is usually a minimal amount of | | | | of the property. That needs to occur within 6 months |
| basis in the equipment at the time of sale. | | | | after the sale of the practice. |
| If a corporation owns real estate, the gain is taxed at | | | | Exchanges can be either total or partially tax-free. If |
| the highest corporate rate. If an individual owns the real | | | | you have sold your practice and are purchasing |
| estate and leases it to the corporation or other legal | | | | another one, it would qualify as a total exchange if you |
| entity, the tax on prior depreciation is 25% and the gain | | | | are purchasing a more expensive practice. If it is less |
| in excess of depreciation is 20%. Goodwill, patient | | | | than the sold assets, you it would result in a partial |
| records, and accounts receivable are also assets | | | | exchange and some taxes would be due. Another |
| usually included in the sale of a dental practice and will | | | | example of a partial exchange is one in which a |
| be taxed at the 20% rate. Needless to say, the tax | | | | practice is sold which includes real estate and the |
| liability can be substantial resulting from an outright sale. | | | | dentist subsequently purchases an apartment building |
| Example of an outright sale of a practice and resulting | | | | for income property. If the building cost was greater |
| tax liability:: | | | | than the real estate sold, no taxes would be due on |
| Equipment: $120,000 gain X 40% tax rate = $48,000 | | | | that portion. Taxes would be due on the other assets |
| Receivables: $ 20,000 gain X 20% tax rate = $ 4.000 | | | | sold. |
| Records: $ 90,000 gain X 20% tax rate = $18,000 | | | | Section 1031 tax-free exchanges are a great way to |
| Real Estate $250,000 gain X 20% tax rate = $50,000 | | | | defer or in some cases eliminate tax liability. It is very |
| Goodwill $115,000 gain X 40% tax rate = $46,000 | | | | important to follow the rules to the letter. Therefore, it |
| As you can see, the total tax liability of $166,000 on | | | | is advisable to seek the guidance of an experienced |
| this hypothetical sale is staggering, but there is a way | | | | attorney and/or CPA before implementation. |
| to defer these taxes until well into the future. It is called | | | | |