Seller Financing and Capital Gains. Are they not applied or just deferred?

[William Coet]

Trying to spell out the benefits of seller financing to a seller.  Any suggestions are welcome.

Info: Seller owns the multifamily house  outright and has owned it for 40 years.  They will be facing a capital gains payment of around $110,000 (Ouch!).

Questions:

1.  If i give them a down payment and they finance the sale over 20 years, are the capital gains deferred or is it taxed at the income tax rate?

2.  If capital gains are deferred does that mean they pay each year? 

3.  Do they pay on the interest and the principal, or only one of them?

Thank you for any info.

[Chris Seveney]

@William Coet

I would be very careful providing sellers tax advice as you don’t know their situation.

At a very high level a property has a “tax basis”, once you exceed that basis you are subject to taxes, whether that happens when sold and paid in full or paid over time

The loan provided by seller financing is like any type of loan where the interest is taxed at ordinary income rates.