Updated July 29, 2026. Quick answer: IRC §1239(a) provides that on a sale or exchange of property, “directly or indirectly, between related persons”, gain recognised to the transferor shall be treated as ordinary income where the property is depreciable in the buyer’s hands. A fair price does not help. The rule keys on the relationship and on the property’s character to the buyer, not on whether you drove a hard bargain.
The rule, and the two things it turns on
§1239(a), “Treatment of gain as ordinary income”: “In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor” is ordinary income if the property is subject to depreciation in the transferee’s hands. Note “directly or indirectly” — interposing an entity does not obviously escape it — and note that the test is the property’s character to the buyer, not to you.
| What is sold | §1239 reaches it? |
|---|---|
| Equipment, fixtures, technology — depreciable to the buyer | Yes |
| Property not depreciable in the buyer’s hands | No |
| Sold at an independently supported fair value | Still yes — price is not the test |
| Sold through an intermediate entity | “Directly or indirectly” is in the statute for a reason |
Why this is the succession case specifically. The two most natural buyers for a professional practice are the associate who already works there and the child who trained for it. Both are the transactions §1239 was written for. Who counts as a related person is defined in §1239(b) and is narrower than ordinary intuition about family — which cuts both ways, and is worth checking rather than assuming in either direction.
It compounds with the buyer’s side. A related-party sale can also trigger the §197(f)(9) anti-churning restriction on the buyer’s amortisation. So the same relationship that converts your gain to ordinary income can remove your buyer’s deduction — both sides worse off than in an identical sale to a stranger, from one fact neither party can change.
One question this site will not answer, and why. Whether goodwill in a practice sale belongs to you personally or to the entity is the most consequential question in a professional-practice deal. It rests on two Tax Court decisions whose primary text we have never been able to obtain from an official court source, and the one-line summaries in circulation overstate what are narrow, fact-bound holdings. So we do not state a rule on it. Anyone telling you the answer is simple, in either direction, is summarising cases they have probably not read either.
If the practice also has a C-corporation history, a third tax can sit at the entity level ahead of both of you.
Sources
IRC §1239(a) and §1239(b) for who is a related person; IRC §1245 for what depreciable property is. Fetched July 2026.
This states what the cited authority says. It is not tax or legal advice. A practice sale turns on the entity form, the allocation actually agreed and the buyer’s own tax position — and one of the most-asked questions in this area is deliberately not answered anywhere on this site, for the reason given on each page that touches it.