Selling a California medical practice to private equity: the tax picture

How California taxes the sale

California taxes the gain on your practice sale as ordinary income at rates up to 13.3 percent. There is no separate capital gains rate. The top bracket is 12.3 percent, and the Mental Health Services Tax adds 1 percent on taxable income above $1 million. For most sellers the whole gain lands in those top brackets. The bracket dollar thresholds are indexed each year, and the 2026 figures had not been published when this page was written. For scale, the 12.3 percent bracket began at $742,953 of taxable income for a single filer in 2025.

Stack that on top of the federal picture from how a practice sale is taxed. Goodwill is taxed at 20 percent federally, so a California seller pays roughly 33 percent combined on it, with almost no federal deduction for the state tax because the SALT cap phases down to $10,000 in a sale year. Ordinary income pieces (the noncompete payment, transition pay, accounts receivable, equipment recapture) are taxed at up to 37 percent federally plus the same 13.3 percent. The allocation fight described on the personal goodwill page matters more here than anywhere else.

Federal breaks that California does not follow

California follows federal law only as of a fixed date. SB 711 moved that date to January 1, 2025 and deliberately left out the federal tax law signed in July 2025. Four consequences matter to a seller.

• QSBS does not exist in California. Section 1202 gain that the federal government excludes is fully taxable on the state return. This only comes up for rollover equity in a holding company, since the practice itself cannot be QSBS under Section 1202(e)(3). See QSBS and Opportunity Zones.
• California never adopted bonus depreciation and caps Section 179 at $25,000, so your California basis in equipment is often higher than your federal basis and California recapture on the sale is usually smaller.
• California does not follow the Opportunity Zone rules, so a Qualified Opportunity Fund defers federal gain but not California gain.
• California does follow the federal installment method, which sets up the trailing rule discussed below.

The pass-through entity tax election

California's elective pass-through entity tax, created by SB 132, lets an S corporation or partnership pay a 9.3 percent tax at the entity level. The owners take a nonrefundable credit on their personal returns, and unused credit carries forward. The election was extended for 2026 through 2030. The point of it is federal: state tax paid by the entity is a business deduction that the SALT cap does not limit.

The election covers the entity's qualified net income, including gain on an asset sale passed through to consenting owners, so in a sale year it can make much of the California tax deductible federally. Two cautions. The June 15 prepayment is the greater of 50 percent of the prior year's elective tax or $1,000, and missing it now reduces each owner's credit by 12.5 percent of the shortfall. And an F-reorganization or an entity that stops existing mid-year raises questions about who makes the election and when. Have this conversation with your CPA before the letter of intent.

Can I move before I sell?

You can, but California has three rules that limit how much it helps, and the year-of-sale move is the fact pattern the Franchise Tax Board audits most.

Where the gain is sourced

Under 18 CCR 17952, gain from selling an intangible, and goodwill is an intangible, is sourced to where the seller lives at the time of the sale, unless the intangible has a California business situs. That last clause is the problem. The goodwill of a medical practice that operates in California arguably has a California business situs. In the Metropoulos decision, goodwill gain that passed through an S corporation was sourced to California because the entity's income was business income apportioned to the state. If your practice is sold as an asset sale, or through an F-reorganization treated as one (the standard structure in these deals), gain on tangible assets and California-situs intangibles is California-source no matter where you live. What a move can shelter is gain on a personal intangible with no California business situs, a narrower path than most sellers hope for.

Installment payments trail you

The regulation is direct about deferred payments. If a California resident sells intangible property on the installment method and later becomes a nonresident, "any later recognized gain attributable to any installment payment receipts relating to that sale will be sourced to California." A seller note or an earnout paid over three years is still California income in years two and three even if you are living in Austin by then. The earnouts and installment sales page explains the federal side of these payments.

Pay for services is separate. Noncompete payments, consulting fees, transition pay, and your employment income under the buyer's agreement are sourced to where the work is done. If you keep seeing patients in California, that income is California-source whatever your domicile.

The residency test and the audit

California decides residency by a closest connections test. It looks at where your home is, where your family is, where you work, where your advisers are, and where you spend your time. Presence in California for more than nine months of the year creates a presumption of residency. No single fact controls. The Franchise Tax Board routinely audits returns that show a large gain in the same year as a mid-year change of residency, so a move should be complete, documented, and ideally in a year before the sale closes. California has no exit tax in force, though bills have been proposed.

Corporate practice of medicine and the MSO structure in California

California has one of the strictest corporate practice of medicine rules in the country. Under Business and Professions Code 2400 and 2052, only licensed physicians, acting through professional corporations, may own a medical practice, and an unlicensed person or company may not practice medicine or control clinical decisions. A private equity fund therefore cannot buy your professional corporation.

What it buys instead is the non-clinical business through a management services organization, the MSO, which owns the equipment, employs the non-clinical staff, and charges your professional corporation a management fee. Your professional corporation continues to exist, owned by a licensed physician who has agreed to work with the MSO. The MSO and friendly PC page walks through the structure.

Transaction notice laws and private equity rules in 2026

Two laws took effect on January 1, 2026 and change how these deals are written in California.

SB 351, signed in October 2025, bars private equity groups and hedge funds involved with a physician or dental practice from interfering with professional judgment: diagnostic tests, referrals, patient care, schedules, medical records, hiring and firing on clinical competency, payer contracting, coding and billing, and equipment stay with the physicians. It also voids any noncompete or nondisparagement clause in a management contract between the PE group and the practice, and the Attorney General may seek an injunction. The broader AB 3129 was vetoed in September 2024, so SB 351 is the operative rule.

AB 1415, also effective January 1, 2026, requires private equity groups, hedge funds, and MSOs to notify the Office of Health Care Affordability (OHCA) of covered transactions on their own. Proposed regulations were released on May 22, 2026; confirm their final status with counsel at the time of your deal.

The underlying OHCA rule requires a Material Change Notice at least 90 calendar days before closing when the health care entity has annual revenue or California assets of $25 million or more, or $10 million or more and is transacting with a $25 million or more entity. A physician organization counts only if it has 25 or more physicians, so a ten-physician group does not file for itself, but the platform buying it usually does. OHCA may open a Cost and Market Impact Review, which can push closing well beyond 90 days. Build that into your timeline.

Non-compete rules for physicians in California

California generally refuses to enforce noncompetes in employment, and SB 351 now voids them in PE management contracts as well. The exception that matters for a seller is Business and Professions Code 16601, which allows a person who sells the goodwill of a business to agree not to compete with the buyer in the area where the business operates. That exception remains valid after SB 351.

The buyer will want a sale-of-business covenant from you, and it will be enforceable if drawn within 16601. The buyer will also want to allocate part of the price to that covenant on Form 8594, and that allocation is ordinary income to you at up to 37 percent federal plus 13.3 percent California, compared with 20 percent federal plus 13.3 percent on goodwill. Negotiate the covenant's price, not just its terms.

Estate tax

California has no estate tax and no inheritance tax. Only the federal estate tax applies, with a 2026 exemption of $15 million per person, indexed after 2026. For a California seller, the estate planning question is usually about rollover equity, which is covered on gifting rollover equity before the second bite.

When the state issue is not the issue

Some sellers spend a great deal on California planning that cannot pay off. If your deal is small and the buyer's allocation is fixed, the 13.3 percent is a cost of living in California and the better question is whether to sell at all. If you plan to stay in California, a move is a life decision rather than a tax strategy. If most of your price is rollover equity, the real risk is the rollover itself, not the state tax on the cash. And if the letter of intent is signed, the structure is set; what remains is the PTET election, the timing of the closing, and the retirement plan deduction.

What to do next

1. Get the California and federal numbers side by side

   Ask your CPA to model the sale with the actual allocation in the draft LOI, including the 13.3 percent, the SALT cap phase-down, and the 9.3 percent PTET credit. The calculator gives a first pass.

2. Decide on the PTET election before June 15

   Confirm the prepayment amount and how an F-reorganization affects who makes the election.

3. If a move is on the table, be honest about the structure

   Ask counsel whether any of the gain is a personal intangible without a California business situs, and whether the move can be completed in the year before the sale. If the answer to both is no, drop the plan.

4. Check the OHCA calendar

   Ask the buyer whether it is filing a Material Change Notice, and add 90 days plus a possible review to your closing date.

Other state pages: New York, Texas, Florida, and the states hub.