1031 Exchange for a Dental Office Building

The building and the plumbing in every operatory exchange; the chairs, the imaging and the patients do not

Treas. Reg. section 1.1031(a)-3 defines real property for exchanges as land plus inherently permanent structures and their structural components, and it lists walls, partitions, wiring, plumbing systems, central heating and air conditioning, and security systems as structural components when they are integrated into the building. The regulation also says customization does not change that answer, so the water, vacuum and compressed-air lines run to each operatory are part of the building even though only a dental tenant would want them.

The equipment those lines serve is different. Chairs, delivery units, cabinetry carts, intraoral scanners, panoramic X-ray units and sterilizers are distinct assets that are designed to be removed, and the regulation's four-factor test for anything not on its list looks at removal cost, whether the item is designed to move, damage on removal and whether it went in during construction. IRS Publication 946 places assets used in personal and professional services in asset class 57.0, with a 5-year recovery period and a 9-year ADS life.

The practice itself is not real property. The same regulation says a license or permit to operate a business on real property is not an interest in real property, and patient records, the practice name and goodwill are intangibles that can never reach your qualified intermediary.

Selling the building with the practice puts both on one Form 8594, and only the real estate line goes to the intermediary

When a buyer acquires your practice and your building together, the deal is an applicable asset acquisition under IRC section 1060. The Form 8594 instructions put buildings, land, furniture and equipment in Class V, section 197 intangibles other than goodwill in Class VI, and goodwill and going concern value in Class VII, and both sides attach the form to their returns. A written allocation agreed in the contract binds both of you unless the IRS finds it inappropriate.

That allocation sets three different tax results. The building price is exchange value. The equipment price is ordinary income up to the depreciation you claimed under section 1245, which for dentists who expensed chairs and imaging in the year of purchase is often nearly all of it. The goodwill price is generally capital gain, taxed in the year of sale whatever happens to the building.

Hypothetical: a buyer pays $3,000,000 for a practice and its 4,000 square foot building, allocated $1,200,000 to the building and land, $300,000 to fully depreciated equipment and $1,500,000 to goodwill. Only the $1,200,000 goes to the intermediary. The $300,000 is ordinary income and the $1,500,000 is taxable capital gain in 2026, so run your own numbers with your CPA before the allocation schedule is signed.

Keeping the building and leasing it to the practice buyer turns your office into a net-lease asset you can exchange later

Many practice buyers prefer to lease rather than buy the real estate, which lets you sell the practice now and keep the building. A building used in your own practice is held for productive use in a trade or business, and once leased to the buyer it is held for investment; section 1031(a) accepts either purpose, so the change of use does not restart any clock.

The lease you sign at the practice closing decides what the building is worth when you sell it. Net-lease investors buy dental space through sale-leasebacks: Essential Properties' 2025 Form 10-K shows 279 medical and dental properties totalling about 2.27 million square feet at $29.97 of rent per square foot, describes typical initial terms of 15 years or more, and reports that 99.2% of its leases require unit-level financial reporting. Term, escalators, a parent guaranty and reporting covenants are what that buyer pool prices.

A short lease signed by a single-office entity with no guaranty leaves you holding a building whose value rests on one practice; a longer lease guaranteed by the buyer's parent is easier to sell later. Our owner-occupied building guide covers the timing for owners who stay on as tenants.

Selling the building to your own professional corporation or partners triggers two related-party rules

Some dentists move the building into the practice entity or sell it to partners before an exit. Under section 1239, gain on a sale of property that is depreciable in the buyer's hands is ordinary income when buyer and seller are related, which includes a corporation or partnership more than 50% owned by the seller. That converts what would have been capital gain into ordinary income.

An exchange with a related person adds a holding requirement. Section 1031(f) disallows the deferral if either party disposes of the exchanged property within 2 years of the last transfer, and the related-person definitions come from section 267(b), which also uses a more-than-50% test for a corporation. A sale to an unrelated practice buyer avoids both rules, which is one more reason to settle who owns the building before a transaction is announced.

Where the building proceeds can go: a medical net lease, a DST, or a split with the practice proceeds invested separately

A dentist leaving practice usually wants income without a tenant to manage. A Delaware Statutory Trust holding medical or net-lease buildings gives direct real-property treatment under Rev. Rul. 2004-86, but the ruling bars the trustee from renegotiating leases or signing new ones except on a tenant's bankruptcy or insolvency, so the original lease and the sponsor's reserves carry the vacancy risk. Our traditional DST page explains the mechanics and the medical office asset class page explains how we review those buildings.

The taxable equipment and goodwill proceeds are a separate planning problem. Capital gain from goodwill can be reinvested in a qualified opportunity fund within its own deadline, and ordinary recapture income is what an accelerated depreciation fund may help offset, subject to the passive-activity rules your CPA must apply.

• Medical or dental net lease: direct title, one tenant, specialized plumbing a non-medical tenant may not pay for.
• Healthcare or diversified DST: no management, no ability to re-lease if a tenant leaves.
• Multifamily or industrial: leaves healthcare entirely while keeping the deferral.

Buying a dental office as replacement property: the practice's financials and the fixture clause before day 45

A dental tenant pays rent from collections, so ask for the practice's financial statements, its provider count, and whether the lease is signed by a single-office entity or guaranteed by a multi-office parent.

Read the lease's fixture and surrender clauses before you identify. If the tenant owns the chairs and imaging, you are buying only real estate and the whole price is exchange value; if the seller includes equipment, Reg. section 1.1031(k)-1(g)(7) lets personal property up to 15% of the real estate's value ride along without breaking the intermediary safe harbor, but that equipment is still taxable boot to you.

Use the identification rules to protect the deal. The three-property rule in Reg. section 1.1031(k)-1(c)(4) lets you name a backup, such as a DST interest, alongside the dental building, and a written revocation can swap names until day 45 ends. If you are comparing a single dental box with a pooled option, our page on single-tenant versus portfolio DSTs sets out the concentration trade-off.