What are the tax benefits of seller financing as the seller?

3 Replies

 I have the inside track on a property which is owned free and clear and the owner stands to make a huge profit. 500K+ 

With seller financing can he delay or minimize his capital gains? Any good books where I can find this info?

@Noel R. I am not a specialist on this but I read a thread where different states have different regulations.. so I would do a search on capital gains
@Noel R. Cash at close, capital gain, and recature are all taxed differently. The seller's CPA can estimate a tax more precisly. Then you throw in an installment sale (seller financing) and it becomes even more complicated. Yes, a seller can spread out their tax over the term of the installments. That's the cap gain/recapture part. By the way, those 2 are at different rates. Then the cap gain is different for different people federally depending on income. On top of that, the cap gain is different in different states. So, if the seller doesn't have much income and the payments of installment sale won't put income too high, then an installment works pretty good. Always ask CPA. All of that being said, that's just the cap gain and recapture. What about any interest earned? That interest is taxed at regular earned income rate. So you helped seller keep thier taxes low on one hand, now if you pay them interest you just took up to half of that away(depending). So, always ask CPA. I know what you are thinking: "Just don't pay interest". That could work. Maybe offer over asking and pay just priciple. Seller's tax is probably lower if cap gain than earned income. Now, we are smart...hold up. The IRS doesn't like that. They may impute interest and still get seller to pay some earned income tax. Here is what I do. Explain the best I can what I think the tax could be, but never sound sure. Make the offer and get seller to check on their on with CPA. We just got a 0 percent loan of 400k accepted yesterday, so it can have benifits for buyer and seller.

Has the seller owned the property for more than a year? If so, the gain is considered long-term. If this is the case, the seller might want to consider a monetized installment sale. 

You, the buyer, would need to come up with your own financing, or pay cash, but the advantage for the seller is that they could defer their capital gains tax for 30 years, and they could walk away with about 93.5% of the net sales proceeds in cash. 

If the seller is made aware of this option, they might be more willing to sell, because they will obtain much more cash from the transaction than if they do a regular sale or a regular installment sale.