I am buying a dental practice and its building. How should we allocate the price?
A dental practice purchase bundled with an owned building is two asset analyses inside one negotiated price. The buyer needs support for practice equipment and goodwill as well as land, building, and any separately owned improvements before the agreement fixes the allocation.
The owner's question
A practice buyer is committing capital to an established patient business and the real estate it occupies. The allocation will shape the buyer's opening tax basis and the seller's transaction reporting.
A dental practice purchase bundled with an owned building is two asset analyses inside one negotiated price. The buyer needs support for practice equipment and goodwill as well as land, building, and any separately owned improvements before the agreement fixes the allocation.
Identify exactly what each entity buys
Dental transactions often involve a professional practice entity and a separate real estate holding entity. Map the legal buyer of each asset to the seller, deed, bill of sale, financing, and operating agreement. A lender's appraisal of the building may not resolve the value of operatories, computers, patient records, contracts, or practice goodwill.
If the buyer is acquiring stock or membership interests instead of assets, the federal basis consequences may be very different. The first tax question is transaction form; only then should the parties negotiate asset categories and any Form 8594 reporting.
Build an allocation that both returns can defend
Form 8594's instructions describe the residual method for covered business asset transfers. The practice and building schedules should reconcile to total consideration, including relevant liabilities and transaction costs. Keep a bridge from the agreement to opening balance sheets and depreciation records; inconsistent schedules invite a correction after closing.
Land is not depreciable. Building assets begin depreciation when placed in service under Publication 946. A later cost segregation study cannot repair an unsupported allocation of the total price between practice and real estate.
Get the tax review before the allocation exhibit is signed
Provide the draft purchase agreement, appraisal, practice equipment list, prior fixed-asset schedules, lease terms, financing documents, and entity diagram. AE can model the buyer's basis and the seller's reporting positions, flag mismatches, and coordinate the final schedules with deal counsel and the return preparers.
The result should be a signed-off allocation and a closing checklist, not a generic depreciation estimate. State professional-practice ownership rules and local transfer costs also require separate counsel and state-tax review.
Primary tax sources
Related AE Tax guidance
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