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

How Texas taxes the sale

Texas has no personal income tax. A Texas resident who sells a medical practice pays federal tax on the gain and nothing to the state on the same income. The federal side is explained on how a practice sale is taxed: 20 percent on goodwill, up to 37 percent on the ordinary income pieces such as the noncompete payment and depreciation recapture, and deferral on rollover equity. In Texas, that federal number is close to your final number.

Because there is no state income tax, several questions that fill the California and New York pages fall away. Texas has no position on QSBS, bonus depreciation, the installment method, or Opportunity Zones at the individual level; the federal answer is the only answer. There is no pass-through entity tax election, because there is no state income tax to deduct, and the SALT cap phase-down is irrelevant here.

The franchise tax

Texas does tax business entities through the franchise tax, sometimes called the margin tax. The rate for most entities is 0.75 percent of taxable margin, and no tax is due for 2026 reports if the entity's total revenue is $2,470,000 or less. Many practices sit above this line in a normal year and already pay; smaller practices file a no-tax-due report.

The sale can change that. Total revenue for franchise tax purposes is built from federal gross receipts, and it may include net gains from the sale of assets, including goodwill. A professional association or PLLC that sells its assets to a management services organization for several million dollars may report total revenue well over the threshold in the year of sale. The resulting bill is small compared with an income tax, but it is a surprise if nobody planned for it. An equity sale by the physician personally, where the buyer purchases interests in the entity, is not an entity-level event for this purpose. Confirm with your CPA how the sale will be reported on the franchise tax return.

Can I move before I sell?

For a physician who already lives in Texas, there is nothing to move. This section is for the seller who lives in California and is thinking about becoming a Texan before the deal closes. Texas is the most common destination for California sellers, and California knows it.

What California does about a move to Texas

California decides who is a resident under a closest connections test. It looks at where your home is, where your family lives, where you work, where your advisers are, and where you spend your days. Spending more than nine months of the year in California creates a presumption that you are a resident. Meeting the day count in Texas is necessary, but it is not enough if your life still points west.

Even a successful move has limits. Under 18 CCR 17952, gain from selling an intangible is sourced to the seller's residence at the time of sale unless the intangible has a California business situs. The goodwill of a practice that operates in California arguably has one, and gain on California tangible assets is California-source regardless of where you live. In the Metropoulos decision, pass-through goodwill gain was sourced to California because the entity's income was business income apportioned to the state. If the deal is an asset sale or an F-reorganization treated as one, which is the private equity norm, a new Texas address does not move the gain.

Deferred payments trail you. The regulation states that if a California resident sells intangible property on the installment method and later becomes a nonresident, any later recognized gain from those installment payments is sourced to California. Pay for services follows the work: if you keep seeing patients in California under the buyer's employment agreement, that income is California-source. The California page covers these rules in depth, and the earnouts and installment sales page covers the federal side of deferred payments. Finally, the Franchise Tax Board routinely audits returns that report a large gain in the same year as a change of residency. A move completed in a prior year, with the old home sold and the family relocated, is a very different case.

Establishing Texas domicile

Texas has no income tax, so it does not care whether you are a resident. The old state does, and its auditors will look at your Texas life for evidence that it is real. Occupy a Texas home as your primary residence. Move your spouse, children, and the things you care about. Get a Texas driver license, register your vehicles, and register to vote. Move your banking, physicians, accountant, and attorney. Keep a day count with supporting records. Sell or stop using the California home, or your case weakens considerably. Together these are what the closest connections test measures.

Corporate practice of medicine and the MSO structure in Texas

Texas enforces the corporate practice of medicine doctrine strictly. The rule is court-developed rather than a single statute: a lay corporation may not practice medicine, employ physicians to practice medicine, or control a physician's clinical judgment. A private equity fund cannot own your practice or employ you as a physician.

The exceptions are specific. Occupations Code 162.001 allows a certified nonprofit health organization, often called a 5.01(a) corporation after the old statute, to employ physicians. Federally qualified health centers, hospital districts, and rural and critical access hospitals have their own exceptions. And physicians may own their practices through professional associations and PLLCs. None of these is available to a private equity fund.

The result is the same structure used in California and New York. The fund owns a management services organization that buys the practice's non-clinical assets, employs the administrative staff, and charges the physician-owned professional entity a management fee. Texas counsel focus on keeping clinical control with the physicians in the management agreement, because a document that hands the MSO authority over clinical matters can violate the doctrine. The MSO and friendly PC page explains the structure.

Transaction notice laws and private equity rules in 2026

Texas has no health care transaction notice law. HB 2747, which would have required advance notice of certain health care transactions, died in committee in 2025. The Legislature meets in regular session only in odd-numbered years, so it does not convene again until January 2027, and no state notice requirement can be enacted before then absent a special session.

Federal antitrust filing requirements still apply to large transactions, but there is no Texas equivalent of the 90-day OHCA notice in California or the 30-day Department of Health notice in New York. Texas deals can close faster for that reason.

Non-compete rules for physicians in Texas

Texas passed SB 1318 in 2025, effective September 1, 2025 for agreements entered into or renewed on or after that date. For a physician noncompete in an employment agreement, the law now requires a buyout option capped at the physician's annual salary and wages at the time of termination. The covenant may last no more than one year after the contract ends and may cover no more than a five-mile radius from the location where the physician primarily practiced. The covenant is void if the physician is terminated without good cause. The law extended the same protections to dentists, nurses, and physician assistants.

Two points for a seller. First, the law applies to employment agreements. It does not address covenants given as part of a sale of a business, so the noncompete in your purchase agreement may still run longer and wider than the employment version. Ask counsel how the two interact and whether the sale covenant survives if you leave the buyer's employment. Second, the payment allocated to the sale covenant on Form 8594 is ordinary income to you at up to 37 percent federal. Texas adds no state tax, but the federal gap between that rate and 20 percent on goodwill is the same as anywhere else. The personal goodwill page covers the allocation. The employment agreement you sign at closing is governed by SB 1318 if it is entered into after September 1, 2025.

Estate tax

Texas 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 most Texas physicians the estate question after a sale is whether rollover equity should be gifted while its value is low and illiquid, which is covered on gifting rollover equity before the second bite.

When the state issue is not the issue

For a lifelong Texas resident, the state is almost never the issue, and you should not pay for state tax planning. The federal allocation, the structure of the rollover, the 1374 built-in gains window if your S election is young, and the franchise tax on the entity's asset sale are the items worth a conversation. For a California physician considering Texas, the move must be judged as a life decision first. If you would not move without the sale, the audit risk and the limited benefit on an asset sale argue against moving for it.

What to do next

1. Ask your CPA about the franchise tax return in the sale year

   Find out whether the asset sale flows into total revenue, whether the entity crosses $2,470,000, and what the margin tax would be.

2. Read the noncompete twice

   Check the employment agreement against SB 1318 (one year, five miles, salary-capped buyout, void without good cause) and ask how the sale-of-business covenant differs.

3. If you are moving from California, decide the structure question first

   Ask counsel whether the deal is an asset sale or F-reorganization of a California practice. If it is, model the sale with California tax included and treat the move as a separate decision.

4. Run the federal numbers

   Use the calculator with the actual allocation from the draft LOI, since federal tax is the whole tax picture for a Texas resident.

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