The short answer
A medical office building exchanges like any other commercial real estate, but only the land, the building and its structural components count as like-kind; imaging equipment, dental chairs and any practice goodwill sold alongside the building are taxed separately. Healthcare buyers underwrite the physician leases against the Stark office-space exception and the Anti-Kickback space-rental safe harbor before they close, so leases at fair-market rent with at least a one-year term are what make the building financeable. If you expensed tenant build-outs with bonus depreciation, the excess over straight-line comes back as ordinary income on a cash sale and is deferred in a complete exchange.
At a glance
| Like-kind scope | Land, building and structural components only (Treas. Reg. §1.1031(a)-3) |
|---|---|
| Stark office-space exception | Written lease, term of at least 1 year, rent set in advance at FMV (42 CFR 411.357(a)) |
| AKS space-rental safe harbor | FMV rent not adjusted for proximity to referral sources (42 CFR 1001.952(b)) |
| Build-out recapture | Bonus on 15-year QIP above straight-line is ordinary income on sale (§1250(b)(1)) |
| Straight-line portion | Unrecaptured §1250 gain taxed at up to 25% (§1(h)(1)(E)), plus 3.8% NIIT if it applies |
| 2026 Medicare conversion factor | $33.40 non-APM / $33.57 APM, up 3.26% / 3.77% from $32.35 (CMS, Oct 31, 2025) |
| Largest MOB owner-buyer | Healthpeak held 507 outpatient medical properties at Dec 31, 2025 (10-K) |
Exam-room partitions and plumbing are like-kind; the MRI, the dental chairs and the practice are not
Since 2018 a 1031 exchange covers only real property, and Treasury Regulation §1.1031(a)-3 draws the line for a medical building: land, the inherently permanent structure, and structural components such as walls, partitions, doors, wiring, plumbing systems, central air conditioning and heating, fire suppression and security systems. Purpose-built features that a physician tenant paid for, such as a sink in every exam room, extra electrical capacity for imaging, or the shielded walls of a radiology suite, are structural components as long as they are integrated into the building.
Machinery and equipment are excluded unless they are a constituent part of the structure, so the imaging units, sterilizers and chairs a tenant leaves behind are personal property and any price allocated to them is taxable outside the exchange. The same regulation states that a license or permit to operate a business on real property is not real property regardless of state law, which is why a practice's clinical licenses, payer contracts and goodwill never ride along in the exchange.
If you are a physician group selling the building and the practice in one transaction, the sale is an applicable asset acquisition under IRC §1060: buyer and seller each file Form 8594, and a written allocation between real estate, equipment and intangibles binds both sides unless the IRS finds it inappropriate. Only the amount allocated to Class V real property goes to your qualified intermediary.
Physician leases have to satisfy the Stark office-space exception before a healthcare buyer will close
Stark reaches any lease between a referring physician and an entity that bills Medicare for designated health services, so a hospital, lab or imaging center as landlord, tenant or buyer pulls the whole rent roll into 42 CFR 411.357(a). Buyers that are health systems or healthcare REITs diligence every lease against that exception, and a lease that fails it is a closing problem, not a footnote.
The exception requires a signed written lease that specifies the premises, a term of at least one year, space that does not exceed what is reasonable and necessary and is used exclusively by the tenant, rent set in advance at fair market value, and terms that would be commercially reasonable even if no referrals passed between the parties. Rent may not be a percentage of revenue earned in the space or a per-unit charge that reflects referred patients, and a month-to-month holdover only qualifies if it continues the same terms as the expired compliant lease.
The Anti-Kickback space-rental safe harbor in 42 CFR 1001.952(b) layers on a definition that surprises sellers: fair market value is the rent for general commercial purposes and may not be adjusted upward for the value of being close to a referral source. A landlord who charged a hospital tenant a premium for proximity, or gave a referring group a below-market suite, should expect the buyer's counsel to reprice or require amendments before the 180-day exchange clock runs out.
Bonus depreciation on tenant build-outs is recaptured as ordinary income on a cash sale and deferred in a full exchange
Interior improvements to a nonresidential building placed in service after the building itself are qualified improvement property under IRC §168(e)(6), a 15-year class that qualifies for bonus depreciation; Public Law 119-21 restored the 100% allowance for qualified property acquired and placed in service after January 19, 2025, as IRS Publication 946 confirms. Medical build-outs are expensive, so an owner who funded suites for new tenants often carries a very low basis in that portion of the building.
QIP is still section 1250 property, and §1250(b)(1) treats depreciation in excess of straight-line as additional depreciation that is taxed as ordinary income when the property is sold. The straight-line portion is unrecaptured §1250 gain capped at 25% under §1(h)(1)(E), and the balance is long-term capital gain, all of it potentially subject to the 3.8% net investment income tax under §1411.
In an exchange, §1250(d)(4) limits the ordinary-income amount to the gain actually recognized, which is zero when you receive no cash and replace all of your debt. Hypothetical: a building bought in 2015 for $4,000,000 with $900,000 of straight-line depreciation and a $500,000 suite build-out fully expensed in 2023 sells in 2026 for $6,000,000, a gain of $2,900,000. On a cash sale roughly $400,000 (the bonus deduction less two years of 15-year straight-line) is ordinary income, about $1,000,000 is 25%-rate unrecaptured gain and $1,500,000 is capital gain; a complete exchange defers all three layers, and any boot you take is characterized as the ordinary layer first.
Buyers price tenant credit, hospital proximity and reimbursement exposure, and the 2026 fee schedule moved all three
The deepest pool of buyers is institutional: Healthpeak's 2025 Form 10-K reports 507 outpatient medical properties after its 2024 merger with Physicians Realty Trust, and it lists the financial viability of the hospitals on whose campuses those buildings sit as a principal risk. Net-lease REITs buy the smaller single-tenant clinics; Essential Properties' 2025 10-K shows medical and dental tenants at 12.5% of its base rent across 279 properties, almost all bought through sale-leasebacks.
Reimbursement is the variable a buyer cannot control, so expect questions about payer mix and the tenants' reliance on Medicare. CMS set the CY 2026 physician fee schedule conversion factor at $33.40 for most clinicians and $33.57 for qualifying APM participants, up 3.26% and 3.77% from $32.35, but it also applied a -2.5% efficiency adjustment to work RVUs for non-time-based services and shifted practice-expense weight toward office-based settings, which favors independent groups in your building over hospital-employed ones.
Group-practice stability is underwritten through lease term, guarantor structure and succession: a five-physician group with two partners near retirement and a lease expiring in 18 months is priced very differently from the same suite on a ten-year term guaranteed by a health system.
Where the proceeds can go: a single clinic on a net lease, a multi-building healthcare DST, or a REIT through the 721 path
A single-tenant urgent care, dialysis or dental box on a long triple-net lease keeps you in healthcare with direct title and full control, but it concentrates the risk you just sold: one tenant, one lease renewal, and a specialized build-out that a non-medical tenant will not want. Our triple-net recommendations cover how to read those leases.
A healthcare-focused Delaware Statutory Trust spreads the same equity across several buildings and tenants and removes the management, which is why it suits an owner who is leaving practice; the trade-off is that Rev. Rul. 2004-86 bars the trustee from renegotiating leases or entering new ones except on a tenant's bankruptcy, so the sponsor's master-lease structure and reserves carry the re-leasing risk. Read the medical office asset-class page for how we evaluate those buildings as replacement property, and the traditional DST solution for the mechanics.
Some DSTs are designed to be contributed later to a REIT's operating partnership under §721, which converts illiquid trust interests into operating-partnership units but ends the ability to 1031 again.
Hypothetical: a two-tenant 12,000 sq ft MOB split between a healthcare DST and an urgent-care net lease
Assume a $6,000,000 sale with a $2,000,000 loan payoff and $200,000 of closing costs, leaving $3,800,000 with the qualified intermediary. To defer everything the replacement must be worth at least $6,000,000 with at least $2,000,000 of new debt or added cash, as explained in the exchange basics.
One split that meets the equation: $2,500,000 of equity into a healthcare DST that carries 50% leverage, giving $5,000,000 of property value and $2,500,000 of allocated debt, plus $1,300,000 of equity and a $1,000,000 loan into a $2,300,000 urgent-care building on a 12-year net lease. Total value $7,300,000 and total debt $3,500,000 both exceed the relinquished figures, and the two properties fit inside the three-property identification rule.
Both closings must occur inside the 180-day window described in the deadline guide, and the DST closing is typically the faster of the two. Confirm the allocation, the recapture layers and the Stark analysis with your CPA and healthcare counsel before the purchase agreement is signed.
Related questions
Can my practice sell its building, lease it back, and exchange the proceeds?
Yes. Property used in your trade or business is eligible under §1031(a)(1), the entity that holds title must be the one that acquires the replacement, and if the buyer is a hospital or other entity that bills for designated health services, the leaseback must meet the 42 CFR 411.357(a) exception at fair-market rent.
The building is a medical condominium; can each physician-owner exchange separately?
Each owner's unit is a fee interest in real property under Treas. Reg. §1.1031(a)-3, so each can run an independent exchange on a sale, and owners who want cash can simply sell. A unit held through a common LLC is a different question, covered on our TIC interest page.
How much equipment can transfer with the building before it complicates identification?
Under Treas. Reg. §1.1031(k)-1(g)(7), personal property that is typically transferred with the real estate and worth no more than 15% of the replacement property's value is disregarded for the identification rules and the intermediary safe harbor. It is still taxable; the rule only keeps it from counting as a separately identified property.
Does a below-market lease to a referring physician group stop the exchange?
It does not affect the tax deferral, but it can stop the sale: a healthcare buyer will treat rent below fair market value to a referral source as a Stark and Anti-Kickback problem and will require an amendment or an indemnity before closing.
Should a physician-owner stay in medical real estate or diversify with the exchange?
That depends on your remaining practice income, other holdings and appetite for single-tenant risk, and it is a decision for you and your advisor; the DST asset-class guide compares healthcare, industrial and net-lease portfolios.
Sources
Checked against these publications on September 19, 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. §1.1031(a)-3, Definition of real property
- Treas. Reg. §1.1031(k)-1, Deferred exchanges (identification and incidental property)
- IRC §1250, Gain from dispositions of certain depreciable realty
- IRC §168, Accelerated cost recovery system (qualified improvement property)
- IRC §1060, Special allocation rules for certain asset acquisitions
- 42 CFR 411.357, Exceptions to the referral prohibition (rental of office space)
- 42 CFR 1001.952, Anti-Kickback safe harbors (space rental)
- IRS Publication 946, How To Depreciate Property
- CMS, CY 2026 Medicare Physician Fee Schedule final rule fact sheet
- Healthpeak Properties, Form 10-K for 2025