Real Asset Investing

Real estate for dermatologists

·
High-rise modern cityscape with skyscrapers and urban streets, representing business and commercial.

Dermatology compensation supports aggressive real estate strategies. Here’s the playbook.

As dermatologists, we operate in a unique financial environment. High income potential, significant cash-pay components, and valuable practice assets create opportunities that are simply unavailable in many other specialties. But with that opportunity comes complexity, especially when your practice becomes a target for private equity or when you start deploying capital into real estate. The standard financial advice often misses the mark. It’s time to move beyond basic retirement accounts and into the strategies that build generational wealth. This isn’t just about buying a rental property; it’s about integrating your practice operations, tax planning, and real estate investments into a single, cohesive financial engine. For a broader look at the clinical and operational side, you can always reference the complete dermatology hub for more resources.

Structuring Your Practice Sale: Asset vs. Stock Sale

Most of us didn’t go to medical school to become experts in M&A, but if you own a practice, this is a lesson that could be worth millions. When a private equity firm comes knocking, the headline number they offer is only half the story. The other half—the part that determines how much you actually keep—is the deal structure. The two primary structures are an asset sale and a stock sale, and the tax implications are night and day.

In an asset sale, the buyer purchases the individual assets of your practice: the equipment, the patient list, the real estate, the accounts receivable. The buyer loves this because they get a “step-up in basis” on these assets, allowing them to depreciate them from their new, higher purchase price. For you, the seller, it’s often a tax disaster. The proceeds from selling depreciated equipment and collecting accounts receivable are typically taxed as ordinary income, which can be as high as 37% federally, plus state taxes. Only the portion attributed to “goodwill” gets the favorable long-term capital gains (LTCG) rate.

In a stock sale, the buyer purchases the shares of your corporation (your S-corp or C-corp). The business entity continues to own all the assets. For you, this is vastly superior. The entire gain from the sale of your stock is typically treated as a long-term capital gain, taxed at preferential rates (currently 0%, 15%, or 20%). The buyer doesn’t get the step-up in basis, which is why they will fight for an asset sale.

The How-To Sequence:

  1. During initial negotiations, insist on modeling the after-tax proceeds of both structures. Don’t just focus on the gross purchase price.
  2. Engage an M&A attorney and a CPA who specialize in healthcare transactions *before* you sign a letter of intent (LOI). The LOI often locks in the structure.
  3. If the buyer insists on an asset sale, negotiate a higher purchase price (a “tax gross-up”) to compensate for your higher tax liability.

The Trap to Avoid: The most common trap is getting seduced by a high offer price in an LOI without realizing it specifies an asset sale. A $10 million asset sale could easily leave you with less cash in your pocket than a $9 million stock sale. The negotiation over structure is just as important as the negotiation over price.

The Equity Rollover: Deferring Tax and Retaining Upside

In many PE deals, the offer isn’t all cash. A significant portion is often “rollover equity,” where you exchange a percentage of your practice’s equity for shares in the new, larger parent company formed by the PE firm. This is a powerful tool, but it’s a double-edged sword that requires careful consideration.

Here’s how it works from a tax perspective. The cash portion of your buyout is a taxable event. You’ll pay long-term capital gains tax on that part of the sale. The rollover portion, however, is generally structured as a tax-deferred exchange under Internal Revenue Code (IRC) Section 351 or 721. This means you don’t pay any tax on the value of the equity you “roll over” until a future “second bite of the apple”—when the PE firm sells the entire larger platform to another buyer, typically 5-7 years down the road.

The How-To Sequence:

  1. Assess Your Risk Tolerance: Rolling over 30% of your sale price means you are concentrating a huge part of your net worth into a single, illiquid, private stock. Are you comfortable with that risk? Or do you need the liquidity and diversification of an all-cash deal?
  2. Analyze the New Capital Structure: Your new equity is not the same as your old equity. The PE firm will likely place a significant amount of debt on the new company. Your rolled equity is subordinate to that debt, meaning the lenders get paid first if things go south. You must understand where you sit in the “capital stack.”
  3. Negotiate Terms: Key points include your rights as a minority shareholder, any required future capital contributions, and what happens if you leave the practice.

The Trap to Avoid: Believing that all rollover equity is created equal. The valuation of the parent company you are rolling into is a critical, negotiable number. If the PE firm inflates the valuation of the new platform, they are effectively reducing the price they are paying for your practice. You are “buying” their stock with your practice equity, so you need to do diligence on the price you are paying. An inflated valuation on the rollover can quietly erode the value of your deal.

R&D Tax Credits for In-House Innovation

When you hear “R&D tax credit,” you probably picture a lab coat, not a laser. But the definition of “research and development” under IRC Section 41 is much broader than most physicians realize. If your practice is involved in developing new processes, techniques, products, or software to improve patient care or operations, you may qualify. For a dermatology practice, this is surprisingly common.

Activities that can qualify include:

  • Developing proprietary skincare compounds or formulations.
  • Creating or significantly improving a clinical technique or procedure.
  • Building custom internal software to track patient outcomes, manage inventory, or streamline workflows.
  • Experimenting with new combinations of treatments to find a superior process.

The core of the R&D credit is the “four-part test.” The activity must be for a permitted purpose (creating a new or improved product/process), be technological in nature, involve the elimination of uncertainty, and include a process of experimentation. Many dermatologists developing a new cosmetic protocol are, without realizing it, doing exactly this.

The How-To Sequence:

  1. Identify Qualifying Activities: Brainstorm with your team. Think about any projects from the last three years where you tried to create something new or improve an existing process and weren’t sure of the optimal design or method from the outset.
  2. Document Everything: The key to claiming the credit is documentation. You need to be able to show the wages of the staff involved (including a portion of your own), the cost of supplies used in the experimentation, and any contract research expenses.
  3. Engage a Specialty Firm: This is not a DIY project for your regular CPA. R&D credit studies are a specialized field. A firm will conduct an engineering-based study to identify qualifying expenses and prepare the necessary IRS forms (Form 6765). Their fee is often a percentage of the credit found.

The Trap to Avoid: Assuming you don’t qualify. Most practice owners who are eligible for this credit dismiss it out of hand because they don’t think of themselves as being in “R&D.” They leave tens or even hundreds of thousands of dollars in tax credits on the table over the years. The failure to explore this is the biggest mistake.

Practice Valuation: The EBITDA Multiple Is Your Scorecard

Whether you plan to sell to private equity, bring on a partner, or just understand the value of your life’s work, you need to speak the language of valuation. For dermatology practices, the dominant metric is a multiple of EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a proxy for the practice’s operating cash flow and profitability.

A PE firm might pay, for example, 8x to 12x EBITDA for a practice. A $5 million practice with $1 million in EBITDA might sell for $8 million. The same practice, if it can increase its EBITDA to $1.2 million, could be worth $9.6 million—a $1.6 million increase in value from a $200k increase in profit. This is the power of the multiple.

So, what drives the multiple higher?

  • Recurring Revenue: Subscription models for cosmetic treatments, membership plans, or a robust retail skincare line are highly valued. They create predictable, non-reimbursed revenue streams.
  • Provider Mix and Scalability: A practice dependent on a single founding dermatologist is risky. A practice with multiple associates, PAs, and NPs on long-term contracts is more scalable and less risky, commanding a higher multiple.
  • Geographic Concentration: A group with several clinics dominating a specific metro area is more valuable than a single-location practice. It offers a platform for growth.
  • Clean Financials: Clear, audited financial statements that accurately reflect the practice’s profitability are essential. Messy books or excessive personal expenses run through the business will lower the multiple. You can find detailed EBITDA multiple benchmarks and trends using tools that aggregate private market transaction data, like Repit data.

The How-To Sequence:

  1. Calculate Your Adjusted EBITDA: Start with your net income and add back interest, taxes, depreciation, and amortization. Then, “adjust” it by adding back one-time expenses and any owner personal expenses run through the business (like a car lease) that a new owner wouldn’t incur. This gives the true picture of profitability.
  2. Focus on EBITDA Margin: Don’t just grow revenue; grow profitable revenue. A practice with $5M in revenue and $1.5M in EBITDA (30% margin) is far more valuable than one with $6M in revenue and $1.2M in EBITDA (20% margin).
  3. Systematize Everything: Create standard operating procedures (SOPs) for everything from patient intake to billing. A business that can run without the owner’s constant intervention is a valuable, sellable asset.

The Trap to Avoid: Optimizing for personal income instead of enterprise value in the 3-5 years leading up to a potential sale. Many owners pay themselves a large salary and bonus, minimizing the practice’s stated profit (EBITDA). While this feels good year-to-year, it crushes your valuation. Every dollar of profit you leave in the business could be worth 8-12x that amount at sale. In the years before a sale, you should be focused on maximizing EBITDA, not minimizing taxes.

Cost Segregation: Supercharging Your Real Estate Depreciation

If you own the building your practice operates in, or any other commercial or residential rental property, a cost segregation study is one of the most powerful tax strategies available. Most physicians simply depreciate their entire building over 27.5 years (for residential) or 39 years (for commercial). This is the default, and it’s terribly inefficient.

A cost segregation study is an engineering-based analysis that dissects the components of your building. Instead of treating it as one big asset, it identifies and reclassifies components into shorter-lived asset classes. For example:

  • 39-year property: The structural shell of the building.
  • 15-year property: Land improvements like parking lots, landscaping, and exterior signage.
  • 7-year property: Office furniture and fixtures.
  • 5-year property: Carpeting, decorative lighting, and specialty electrical or plumbing for medical equipment.

By reclassifying, say, 25% of a $2 million building’s cost from 39-year property to 5- and 15-year property, you can dramatically accelerate your depreciation deductions. Even better, these shorter-lived assets are often eligible for 100% bonus depreciation (though this is phasing down), allowing you to deduct their entire cost in the first year. This can generate a massive paper loss, creating a huge tax refund you can reinvest. You can model out different scenarios using a real estate investing calculator to see the impact on cash flow.

The How-To Sequence:

  1. Identify a Property: This works for properties you already own (you can do a “look-back” study) or one you are about to purchase. The higher the purchase price, the more beneficial the study.
  2. Hire a Reputable Engineering Firm: The IRS requires these studies to be done by qualified engineers. Your CPA can likely refer you to one. The cost is typically a few thousand dollars but the tax savings can be 5-10x the fee in the first year alone.
  3. Claim the Deductions: The firm provides a detailed report that your CPA uses to file Form 3115, Application for Change in Accounting Method, to claim the accelerated depreciation.

The Trap to Avoid: Thinking this is too aggressive. Cost segregation is a well-established, IRS-sanctioned tax planning strategy. The only mistake is not doing it. The second trap is for physicians who have high W-2 income. By default, rental losses are “passive” and can only offset passive income, not your active clinical income. The key to unlocking these massive losses against your W-2 is for your spouse to qualify for Real Estate Professional Status (REPS). This requires them to spend more than 750 hours per year and more than 50% of their total working time on real estate activities. If they can qualify and you file jointly, the paper losses from cost segregation can directly offset your six- or seven-figure clinical income, resulting in enormous tax savings.

Reviewed by Pouyan Golshani, MD, Interventional Radiologist — May 21, 2026