Capital Gains Tax for Physicians: Complete 2026 Guide to Practice Sales, NIIT, and Exit Planning

Physicians often optimize salary deferrals and deductions but still overpay on exits and rebalancing. The capital gains tax for physicians is rarely one number. It is usually a stack of federal long-term rates, NIIT, state taxes, and deal-specific reclassification into ordinary income. If you are selling a practice, trimming concentrated stock, or disposing of appreciated real estate in 2026, the highest-value planning happens before the transaction documents are final.

Focus Investment Banking has noted that expected tax-policy changes can alter medical-practice deal timing. Curi Capital has emphasized that physician tax strategy should match career stage and household goals. ACC's Health Care Law Today discussion of recapitalization deals highlights a key reality: tax terms often become gating deal issues. Put simply, model first, negotiate second, and only then execute.

Capital gains tax for physicians: 2026 rules that drive most outcomes

1) Tax character usually matters more than the headline rate

A physician hears 20% long-term capital gains and assumes that is the deal tax rate. In practice, the transaction may include multiple buckets:

• Capital gain items (for example, certain goodwill or equity interests)
• Ordinary-income items (for example, receivables, portions of depreciation recapture, compensation-style earnouts, non-compete payments)
• Timing differences (installments, contingent payments)

If ordinary-income buckets are large, your blended tax rate can climb far above the simple long-term capital gains number.

2) Your real rate is layered, not single

For many high-income physicians, a practical planning formula is:

Effective rate on each dollar of gain = federal capital gains rate + NIIT (if applicable) + state/local rate - strategy offsets

In high-income households, that can mean a federal 20% long-term rate plus 3.8% NIIT before state tax is added. State impact can be 0% to double digits depending on domicile and sourcing rules.

3) Timing and structure can beat reactive tax prep

Once a purchase agreement is signed with fixed allocation, your flexibility usually drops. Physicians who wait until return-prep season are often negotiating after leverage is gone. This is why the pre-close period matters most.

Where physicians most often trigger large capital gains

Practice sale or recapitalization

This is the largest one-time event for many owners. Allocation across goodwill, equipment, receivables, and compensation-related terms can move taxes by tens or hundreds of thousands.

Concentrated brokerage or legacy stock positions

Many physicians build concentrated positions over time and then postpone selling due to tax fear. Delaying can raise concentration risk while taxes remain unmanaged.

Real estate sales inside a broader physician plan

Investment property gains may be deferred with a 1031 exchange in qualifying cases, but this does not solve every physician tax problem. It also can create illiquidity and strict timing pressure.

Private fund and partnership distributions

K-1 timing, carry, and multi-state filing can make gains less predictable than physicians expect. Planning for cash reserves and estimated payments becomes critical.

Decision framework: estimate after-tax proceeds before you sell

Use this sequence before any major gain event:

1. Identify all gain sources for the next 24 months.
2. Split each source into tax character buckets: capital, ordinary, and uncertain.
3. Estimate federal layer: long-term or short-term treatment, plus NIIT exposure.
4. Add state layer based on likely residency and sourcing facts at transaction date.
5. Pressure-test structure options: allocation changes, installment terms, harvesting losses, charitable planning, and retirement contribution timing.
6. Build three scenarios: conservative, expected, optimistic.
7. Decide using net proceeds and risk-adjusted flexibility, not tax rate alone.

A good physician model tracks two outputs: cash kept after tax and complexity introduced. Lower tax with high execution risk may not be the best choice.

Scenario table: first moves by physician profile

This table is not about finding one perfect strategy. It is about sequencing decisions in the order that preserves optionality.

Fully worked numeric example: physician practice transaction

Assumptions:

• Married filing jointly physician-owner.
• Other taxable income already keeps household in top ordinary bracket.
• Total transaction value: $2,400,000.
• Initial allocation:
  • $1,500,000 to goodwill (modeled as long-term capital gain)
  • $650,000 to ordinary-income items (recapture, receivables, compensation-style terms)
  • $250,000 non-compete payment (ordinary income)
• Modeled rates:
  • Long-term gain layer: 28.8% combined (20% federal + 3.8% NIIT + 5% state)
  • Ordinary-income layer: 42% combined (37% federal + 5% state)

Base-case tax estimate

• Tax on capital-gain bucket: $1,500,000 x 28.8% = $432,000
• Tax on ordinary bucket: $900,000 x 42% = $378,000
• Total estimated tax: $810,000
• Estimated after-tax proceeds: $1,590,000

Structured negotiation adjustment

Suppose the physician negotiates a reallocation supported by valuation work:

• Non-compete reduced from $250,000 to $100,000
• Goodwill increased by $150,000
• New buckets:
  • Capital gain = $1,650,000
  • Ordinary income = $750,000

Recomputed tax:

• Capital bucket tax: $1,650,000 x 28.8% = $475,200
• Ordinary bucket tax: $750,000 x 42% = $315,000
• Total estimated tax: $790,200
• Estimated tax savings vs base case: $19,800

Tradeoffs you must acknowledge

• Buyer resistance: buyers may prefer allocations that maximize their deductions.
• Valuation support: aggressive allocations without support increase exam risk.
• Legal friction: changing economic terms for tax reasons can slow closing.

The takeaway is not that every physician should push goodwill higher. It is that tax-character allocation is negotiable in many deals, and even modest shifts can move meaningful dollars.

Step-by-step implementation plan

1. Set your target transaction date and backup date.
2. Build a 24-month gain map including practice, brokerage, real estate, and partnership interests.
3. Request a pre-LOI tax memo from your CPA and transaction attorney focused on character allocation risks.
4. Create a one-page blended-rate model with three scenarios and update it as terms change.
5. Review entity structure and compensation terms to separate true purchase price from service compensation.
6. Decide your rebalancing cadence for taxable accounts so gains are intentional, not emotional.
7. Evaluate charitable and loss-harvesting capacity before year-end windows close.
8. Document residency facts if a state move is part of your plan, with legal records and timeline proof.
9. Re-run estimated tax payments after signing major transaction terms.
10. Do a final pre-close review of purchase agreement language against your model.

If you cannot complete this sequence before closing, prioritize items 3, 4, and 10 because they directly affect irreversible tax outcomes.

30-day checklist for physicians

Week 1:

• [ ] Export all taxable-account tax lots and unrealized gain/loss data.
• [ ] List every potential gain event over the next 24 months.
• [ ] Confirm current state residency facts and planned changes.
• [ ] Ask your CPA for a draft blended-rate estimate.

Week 2:

• [ ] Review draft deal terms for practice sale character buckets.
• [ ] Identify where ordinary-income reclassification may occur.
• [ ] Quantify NIIT exposure under expected and worst-case scenarios.
• [ ] Build a tax-cash reserve plan for estimated payments.

Week 3:

• [ ] Run at least two allocation alternatives in writing.
• [ ] Decide whether installment terms improve or worsen your risk profile.
• [ ] Pair planned gain recognition with available loss-harvesting opportunities.
• [ ] Re-check retirement contribution timing for overall tax efficiency.

Week 4:

• [ ] Finalize advisory team sign-off on assumptions.
• [ ] Align legal documents with tax model language.
• [ ] Confirm post-close cash flow, withholding, and estimated tax schedule.
• [ ] Archive support files for valuation and allocation positions.

Common mistakes physicians make on capital gains

1. Treating all sale proceeds as capital gain.
2. Waiting until documents are final before modeling after-tax proceeds.
3. Ignoring NIIT and state taxes while focusing only on federal rates.
4. Letting concentration risk grow because selling feels tax-inefficient.
5. Assuming a state move right before closing is automatically defensible.
6. Confusing tax deferral with tax elimination.
7. Overusing complexity when the net savings is small.
8. Failing to align legal language with tax assumptions.
9. Underfunding estimated taxes after a large gain event.
10. Not stress-testing downside scenarios, including delayed close or lower valuation.

A practical filter for every strategy: if the savings are unclear, the documentation is weak, or the execution burden is high, reduce complexity and choose a more durable approach.

How This Compares to Alternatives

If you are comparing real estate deferral tools, start with 1031 exchange vs itemized deductions and 1031 exchange vs standard deduction to avoid category errors.

When Not to Use This Strategy

This specific high-touch planning approach may not be appropriate when:

• Your total expected gains are modest and compliance cost would consume much of the benefit.
• Your deal is too close to closing to implement changes safely.
• You do not have reliable records to support valuation and allocation positions.
• You are already overextended and cannot execute the documentation burden.
• Your primary objective is simplicity and predictable operations, not maximum optimization.

In these cases, a simpler plan with conservative assumptions is often better than a complex strategy you cannot execute cleanly.

Questions to Ask Your CPA/Advisor

1. Which parts of my expected proceeds are likely capital gain versus ordinary income, and why?
2. What is my blended effective tax rate under base, best, and worst scenarios?
3. How much of my gain is exposed to NIIT under current projections?
4. Which state sourcing and residency rules apply to my transaction facts?
5. What allocation terms are most defensible if audited?
6. What is the tax impact if closing shifts from this year to next year?
7. Should installment terms improve taxes enough to justify credit and execution risk?
8. What estimated-tax payments should I schedule immediately after closing?
9. Which losses can I harvest now without distorting my portfolio plan?
10. How should charitable planning interact with this gain event?
11. What documents should I retain to support allocations and residency?
12. What is our fallback plan if tax law or deal terms change late?

Next actions for your 2026 plan

Use this guide as a planning workbook, then build your broader stack with related resources:

• Tax Strategies hub
• Best tax deductions for high-income earners
• Best tax deductions 2025
• Blog library
• Programs

Educational note: tax outcomes depend on facts, deal terms, and jurisdiction. Use this framework to ask better questions and make clearer decisions with your licensed tax and legal advisors.