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!