Can I sell my medical building to the hospital I refer to and still do a 1031 exchange?

Section 1031 treats the hospital as any other buyer

The related-party rules in section 1031(f) reach family, the trustee of a trust you benefit from, and entities you own more than half of, by reference to section 267(b). A nonprofit health system or a public hospital company is none of those, so the two-year holding rule does not apply. Your building was held for productive use in your trade or business, which section 1031(a)(1) covers.

The clock is the ordinary one. Under Reg. section 1.1031(k)-1(b)(2) the identification period and the exchange period both begin "on the date the taxpayer transfers the relinquished property," and a qualified intermediary is one that, under a written exchange agreement, "acquires the relinquished property from the taxpayer," so the agreement has to be signed before the closing. Selling a medical practice building covers the two-closing calendar when the practice is sold at the same time.

The sale itself is a financial relationship, and the isolated-transactions exception is built for it

The statute, 42 U.S.C. 1395nn(a), says that if a physician has a financial relationship with an entity, the physician "may not make a referral to the entity for the furnishing of designated health services" payable by Medicare, and the entity may not bill for them. Section 1395nn(h)(1) defines a compensation arrangement as "any arrangement involving any remuneration" between a physician and an entity, and 42 CFR 411.354(c) repeats it. A purchase price for your building is remuneration.

The statute's own exception for this is section 1395nn(e)(6), "an isolated financial transaction, such as a one-time sale of property or practice," and the regulation that implements it is 42 CFR 411.357(f). It has four conditions: the remuneration is consistent with fair market value and not determined by the volume or value of referrals or other business between you; the arrangement would be commercially reasonable even with no referrals; there are no additional transactions between you for six months, apart from arrangements that meet their own exception and commercially reasonable post-closing adjustments; and any debt forgiveness settles a bona fide dispute.

Fair market value is defined in 42 CFR 411.351 through general market value, which for an asset purchase is "the price that an asset would bring" through bona fide bargaining between "a well-informed buyer and seller that are not otherwise in a position to generate business for each other." A valuation that credits the hospital's referral stream to the price fails that test.

Installment payments and seller financing have to be fixed and secured, and they are not like-kind property

Section 411.351 allows an isolated financial transaction to be paid in installments only if "the total aggregate payment is fixed before the first payment is made," does not reflect referrals, and the payments are "immediately negotiable, guaranteed by a third party, secured by a negotiable promissory note," or protected by a similar mechanism against default. An earn-out tied to future admissions, or an unsecured note from the system, falls outside the definition.

For the exchange, a note is not real property. Section 1031(b) recognizes gain up to the money and the fair market value of other property received, and carrying a note for your buyer explains how an intermediary can hold a note so the cash portion still exchanges. Both rules favour the same structure: a fixed price paid in cash at closing.

The six-month quiet period and the 180-day exchange run on separate tracks

The six-month condition in section 411.357(f)(3) binds you and the hospital. Your exchange runs with the qualified intermediary and the sellers of your replacement property, not with the hospital, so identifying within 45 days and closing within 180 days happen outside that restriction. What the six months affects is any new arrangement with the system in that window, such as a medical directorship, which must meet its own exception.

If your practice stays in the building, the lease back is one of those arrangements, and the office-space exception in section 411.357(a) governs it: a signed written lease specifying the premises, a term of at least one year, space no larger than reasonable and used exclusively by the tenant, rent set in advance and consistent with fair market value, and no rent based on referrals, a percentage of revenue from the space, or per-unit charges for referred patients. The medical office property page covers how buyers review those leases, and sale-leaseback then 1031 covers keeping the lease well under thirty years.

Worked example: a $4,000,000 building sold to the system with a leaseback and an all-cash exchange

Hypothetical, round numbers. A three-physician group's LLC owns a debt-free medical office building that an appraiser values at $4,000,000 for general commercial purposes. The health system pays $4,000,000 in cash at closing, the practice signs a ten-year lease for its suite at appraised market rent with fixed 2% increases, and no other agreement is signed between the parties for six months.

The LLC's $1,200,000 adjusted basis leaves a $2,800,000 gain, deferred in full when the intermediary places the entire $4,000,000 into all-cash traditional DSTs within 180 days. Those interests cannot be sold on demand, the sponsor controls the sale date, and the property can lose value. Had the system paid $3,000,000 at closing and $1,000,000 by unsecured note over three years, the note would be taxable boot and the installment terms would miss the isolated-transaction definition. Put the same term sheet in front of your CPA and your healthcare counsel before you sign it.