The short answer
An ambulatory surgery center building exchanges like other commercial real estate, but most are owned by a physician real estate LLC, and that LLC, not each surgeon, is the taxpayer that must buy the replacement unless the owners restructure well before the sale. The lease to the surgery center is the asset buyers price, so it should meet the federal Anti-Kickback space-rental safe harbor: a written lease of at least a year at fair market rent that does not reflect referrals. Surgical equipment, sterilization systems and the surgery center business itself are not real property and are taxed outside any exchange.
At a glance
| Who exchanges | The entity on title; partnership interests are never real property for 1031 |
|---|---|
| AKS space-rental safe harbor | Written lease, term of at least one year, rent set in advance at fair market value |
| Stark and ASC services | ASC services paid under the ASC rate are not designated health services |
| Large ASC operator | 173 of its 176 surgical facilities sit on leased real estate |
| Typical operator lease | Initial terms generally 10 years, range 2 to 15, options up to 10 more |
| 2026 ASC conversion factor | $56.322, up 2.6% from $54.895 for centers meeting quality reporting |
| Procedure migration | CMS added 276 procedures to the ASC list for 2026 and began a three-year inpatient-only phase-out |
The LLC on title is the taxpayer, so surgeons who want different outcomes need to plan before the listing
Under Treas. Reg. section 1.1031(a)-3(a)(5) an interest in a partnership is never real property for section 1031, and a multi-member LLC taxed as a partnership is a partnership. When the building sells, the LLC must acquire the replacement; a surgeon who wants cash and a partner who wants to exchange cannot each go their own way at closing.
The common fixes are a redemption of the cash-out member or a distribution of tenancy-in-common interests to members well before the sale, each of which raises holding-period questions your counsel should time carefully. Our guides on multi-owner exchanges and drop-and-swap strategies cover the options and their risks.
What the LLC sells is real property: land, building and structural components such as walls, medical gas and plumbing piping, HVAC systems, fire suppression and security. Operating tables, anesthesia machines, sterilizers designed to be moved and imaging units are personal property, and the surgery center partnership usually owns them, not the real estate LLC.
The lease must fit the Anti-Kickback space-rental safe harbor, because surgeons are on both sides of it
When the same physicians own the building and refer patients to the surgery center that rents it, the rent is a potential channel for remuneration. The space-rental safe harbor in 42 CFR 1001.952(b) protects it if six standards are met: a signed written lease covering all premises, an exact schedule for part-time use, a term of at least one year, aggregate rent set in advance at fair market value and not tied to referrals, and space no larger than reasonably necessary. Fair market value is the general commercial rent, not a premium for proximity to referral sources.
Stark is narrower here than for a medical office building. Under 42 CFR 411.351, designated health services do not include services paid by Medicare as part of a composite rate, and the definition names ASC services as an example. If the building also houses imaging, a lab or physical therapy billed outside the ASC rate, or a hospital is a tenant or buyer, the Stark office-space exception covered on our medical office page comes back into play.
The investment safe harbor for surgery centers in 42 CFR 1001.952(r) also requires the center's operating and recovery room space to be dedicated exclusively to the ASC, which is a layout fact a buyer will verify against the lease's premises description.
Buyers price a long lease to a surgery partnership and the procedure growth behind it
Surgery Partners' 2025 Form 10-K describes the tenant side: 176 surgical facilities, 157 of them ASCs, mostly owned in partnership with physicians; 173 of the 176 sit on leased real estate, leases generally have 10-year initial terms ranging from 2 to 15 years with options for up to 10 more, the parent generally guarantees its partnerships' leases, and most ASCs are 8,000 to 12,000 square feet.
Reimbursement drives the tenant's ability to pay. In its CY 2026 OPPS and ASC final rule, CMS set the ASC conversion factor at $56.322, a 2.6% update from $54.895 for centers meeting quality reporting, added 276 procedures to the ASC covered procedures list plus 271 codes it removed from the inpatient-only list, and began phasing out the inpatient-only list over three years.
Buyers therefore look at three things: a parent guarantee or the partnership's own financials, the remaining term against the 10-year norm, and specialty mix. A center whose specialties benefit from the procedure shift supports the rent; one tied to a single surgeon near retirement does not.
Recapture and the replacement: build-out depreciation, then a medical office DST or diversification
Operating rooms are expensive interiors. Interior improvements placed in service after the building are qualified improvement property under section 168(e)(6), 15-year property eligible for the bonus depreciation that Publication 946 confirms at 100% for property acquired after January 19, 2025. Bonus above straight-line is ordinary income under section 1250 on a cash sale and deferred in a complete exchange.
Hypothetical: an LLC that built a $6,000,000 center, including a $2,000,000 interior, sells it for $9,000,000 with $2,500,000 of depreciation taken, $1,200,000 of it bonus above straight-line. A cash sale produces $1,200,000 of ordinary income, $1,300,000 taxed at up to 25% and $3,000,000 of capital gain; a complete exchange defers all three. Run your own numbers with your CPA.
Physician owners who want to stay in healthcare real estate often look at a medical office DST under the traditional DST structure, and Rev. Rul. 2004-86 explains why the trustee cannot renegotiate those leases. Others diversify away from the specialty they practice in.
Buying a surgery center building as replacement property: the tenant, the safe harbor and the layout before day 45
Get the lease, the guarantor's financial statements and the surgery center's case volume by specialty. Confirm whether the guarantor is a national operator, a hospital system or only the local partnership, and how many of the partnership's surgeons are near retirement.
Have healthcare counsel review the lease against 42 CFR 1001.952(b) before you identify. If you will be the landlord and none of your owners refer to the center, the referral concern is smaller, but the existing rent still has to be fair market value or the tenant may seek to amend it.
Check the building as a building: medical gas systems, air handling, backup power and the cost to convert operating rooms to other medical use if the center leaves. Use the three-property rule in Treas. Reg. section 1.1031(k)-1(c)(4) to name a medical office DST as a backup, since tenant estoppels and counsel review often run past 45 days.
Related questions
Can each surgeon exchange his share of the building separately?
Not if the building is owned by an LLC taxed as a partnership, because partnership interests are not real property for 1031. Members who want different outcomes need to restructure ownership well before the sale with counsel's help.
Does Stark apply to my surgery center lease?
Usually not to the ASC services themselves, which are excluded from designated health services when paid under the ASC rate. It can apply if the building houses separately billed services such as imaging or lab, or if a hospital is involved.
Can the surgery center partnership buy the building from our LLC?
It can, and the sale proceeds can still go to a qualified intermediary. Section 1031(f) adds rules for exchanges with related persons, including a two-year holding requirement, so if the partnership and the LLC share owners, have counsel confirm how those rules apply before you sign.
Do the operating room build-outs count as real property?
Walls, ceilings, medical gas piping, plumbing and HVAC integrated into the building are structural components. Surgical lights, booms and tables designed to be removed are judged under the regulation's factors and are often personal property.
Are there DSTs that own surgery centers?
Medical office DSTs can include outpatient surgical tenants, but we have not verified a current offering dedicated to surgery centers; ask through the form when you are ready to identify.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Treas. Reg. section 1.1031(a)-3, Definition of real property
- 42 CFR 1001.952, Anti-Kickback safe harbors (space rental and ambulatory surgical centers)
- 42 CFR 411.351, Definitions (designated health services)
- CMS, CY 2026 OPPS and ASC Payment Systems final rule (Nov 25, 2025)
- IRC section 168, Accelerated cost recovery system (qualified improvement property)
- IRS Publication 946, How To Depreciate Property
- IRC section 1250, Gain from dispositions of certain depreciable realty
- IRC section 1031, including (f) related-party exchanges
- Treas. Reg. section 1.1031(k)-1, Deferred exchanges
- Rev. Rul. 2004-86
- Surgery Partners, Form 10-K for 2025