Owner financing tax question

1 Reply

This is something that was brought up in one of the more recent podcast. I’ve went back through and listened to several podcast but can’t find it and I don’t remember which guest said it.

It went something like this.

If I were owner financing a home from a seller it would be better for them if I were to raise the price a little and have them give me a 0% loan. I’m guessing this would be due to them having to pay taxes on the interest income but not having to pay taxes on principal reduction payments. Does that sound correct? Is there anything more I should know about this or is it literally that straight forward?

Interest income for the lender is taxed at the personal income tax rate (ordinary income) while principal repayment is not.

Therefore, you can make the deal more attractive to the seller by offering a higher price for the property at a lower interest rate. The lost interest payment to the seller will be compensated by the higher sale price. 

The seller should be happy with this, as 1) they won't pay as much in interest income taxes, and 2) they will receive more money up front and can invest it in higher yielding opportunities than the interest rate on the note.

Note that this deal is only good for you if the additional money spent on a higher purchase price is less than or equal to the reduction in interest expense that results from a lower interest rate.

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