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Tax, SDIRAs & Cost Segregation

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Joshua Aycock
Pro Member
  • Investor
  • Stillwater, MN
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Tax Implications for Seller in Seller-Financed Deal?

Joshua Aycock
Pro Member
  • Investor
  • Stillwater, MN
Posted Jul 26 2022, 13:54

What are the tax implications for the seller in an owner-financed deal? 

I've identified an off-market property that I'd try to get seller financing on. They've held the property for a couple decades, and would likely have a significant capital gains tax liability if they were to sell it on the open market. 

If they write a seller financed note, would they still need to pay that capital gains tax? 

My thinking: seller financing represents a debt owed to the seller. Therefore, it's an installment sale. I am thinking that they wouldn't have to pay cap gains tax on the "sale" because they'd be earning interest income on the loan payments. There would be a separation between principal return and interest payments. 

Similar thinking of how taxes would work at a traditional bank: they pay tax on only the interest earned, not on the principal repaid. 

Can someone check my thinking/understanding of seller-financed tax implications? 

Thanks in advance!

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