Save Taxes When Selling a Dental Practice With a Section 1031 Exchange

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A dental practice is sold for a variety of reasons: retirement, moving to another city, or even because of health issues. Regardless of the reason, it is critical to consider the tax ramifications of the sale. Depending on the type of assets sold, the seller can pay up to 40% of the gain. For example, a majority, if not all, of the equipment is likely to be taxable at the highest rates for both individual and corporate owners. This is because the dental equipment is written off in the year of purchase or depreciated over a 5 to 7 year period. Therefore, there is usually a minimum amount of equipment in the time of sale.

If a corporation owns a real estate, the gain is taxed at the highest corporate rate. If an individual owns the real estate and leases it to the corporation or other legal entity, the tax on prior depreciation is 25% and the gain in excess of depreciation is 20%. Goodwill, patient records, and accounts receivable are thus assets typically included in the sale of a dental practice and will be taxed at the 20% rate. Needless to say, the tax liability can be substantial.

Example of an outright sale of a tax liability

Equipment: $ 120,000 gain X 40% tax rate = $ 48,000

Receivables: $ 20,000 gain X 20% tax rate = $ 4,000

Records: $ 90,000 gain X 20% tax rate = $ 18,000

Real Estate $ 250,000 gain X 20% tax rate = $ 50,000

Goodwill $ 115,000 gain X 40% tax rate = $ 46,000

As you can see, the total tax liability of $ 166,000 on this hypothetical sale is staggering, but there is a way to defer taxes until well into the future. It is called a Section 1031 tax free exchange.

Deferring taxes through a tax-free exchange

Section 1031 of the Internal Revenue Code has been in existence since the early part of the 20th century. If you purchase "like-child" property within six months of the sale of the practice, your taxes will be deferred, as long as the various rules are satisfied. There are two time periods involved. The first one, called the identification period, requires the seller to identify itself as one of three replacement properties within 45 days. The second period is the actual purchase of the property. That needs to occur within 6 months after the sale of the practice.

Exchanges can be totally or partly tax-free. If you are looking for a better way of doing it, then it would be a good idea if you were to spend a lot of money on it. If it were less than the assets, you would have a partial exchange and some taxes would be due. Another example of a partial exchange is one which pays for itself. If the building cost was greater than the real estate sold, no taxes would be due on that portion. Taxes would be due on the other assets sold.

Section 1031 tax-free exchanges are a great way to defend or avoid tax liability. It is very important to follow the rules to the letter. Therefore, it is advisable to seek the guidance of an attorney and / or CPA before implementation.

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Source by Kent Harlan

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