Seller financing with zero interest

1 Reply

Hello BP. 

Question.  Is it true that for the first year a seller doesn't have to pay taxes on a seller financing structured deal?  How is it taxed in other years, as ordinary income tax?  Also, what if the deal was structured with zero percent interest, is there a benefit for the seller in terms of taxes?

I saw this in the tax code form 537, how does this apply in the above situation?

"Interest Income

You must report interest as ordinary income. In-
terest is generally not included in a down pay-
ment. However, you may have to treat part of

each later payment as interest, even if it’s not
called interest in your agreement with the buyer.

Interest provided in the agreement is called sta-
ted interest. If the agreement doesn’t provide

for enough stated interest, there may be unsta-
ted interest or original issue discount (OID). See

Unstated Interest and Original Issue Discount"

@Lamont Marable No.

The money the seller receives goes into 4 buckets….

1) interest income, taxed as ordinary/interest income

Of the principal payments rec’d, including the down payment…

2) return of basis ie. if he sold it for twice what he paid for it (accounting for actual sales/closing cost) 1/2 would be return of basis, no tax

3) the other half of principal would be taxed as cap gains

4) as he receives principal he will also be liable for depreciation recapture tax