Potential Taxes on Seller Financing

Real Estate Agent · Austin, TX · Member since 2018 · 8 posts · 5 votes

Hi,

I have an opportunity to purchase a few duplexes via seller financing. I am in the process of conversations with the seller and I want to show them some of the benefits of an arrangement like this. My question is concerning tax liabilities the seller might incur by transferring title but holding the note.

I know in a typical sell it triggers a tax liability for the seller. Is there any tax liability that happens when the seller holds the note on the property? Is it just the principal and interest paid during the year?

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Chris McCormack

Accountant · Edina, MN · Member since 2020 · 172 posts · 97 votes

Benefits can include paying the taxes over time. A portion of the payments will be a return of basis, the other is attributable to capital gains. They'll pay capital gains tax on the amounts attributable to the gain.

The one area they should concern themselves with is depreciation recapture which is due upon sale. If they've been depreciating the property over the course of its life, they'll be faced with a 25% tax on the recapture.

Work with a tax strategist and you can come up with something that works well for both.

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Chris McCormack
Accountant · Edina, MN · Member since 2020 · 172 posts · 97 votes
4y
Benefits can include paying the taxes over time. A portion of the payments will be a return of basis, the other is attributable to capital gains. They'll pay capital gains tax on the amounts attributable to the gain.
The one area they should concern themselves with is depreciation recapture which is due upon sale. If they've been depreciating the property over the course of its life, they'll be faced with a 25% tax on the recapture.
Work with a tax strategist and you can come up with something that works well for both.
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Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
4y
@Justin Hroch
Because seller-financed deals can pose tax complications, engage a financial planner or tax expert as part of your team. Also, unless you’re experienced and comfortable get in touch with a local agent or investor and shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

All the best!
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
4y
The lower the down payment the lower they are taxed. It could keep them from getting to that next tax bracket
All the interest you pay them is taxable, the lower the interest rate the less they get taxed
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
4y
@Justin Hroch
This may indeed help him reduce his taxes. It can also increase his taxes, depending on the situation. For example, if he had very little income this year but expects more income in the future, he might be better off claiming the entire gain now. We also might have higher capital gain tax rates in the future, nobody knows.

Various other factors might come into play. What if he has large capital losses to offset? What if he has suspended passive losses that he might unlock? And many other possibilities. Not to mention non-tax factors such as the risk of your default.

You need to be careful to avoid legal liability for giving him tax advice, especially since you're a licensed Realtor. While it is likely that he will benefit, it is not guaranteed. The safe route is to tell him: from what I know, you might be able to save on taxes with owner-financing. Please discuss it with your accountant and, if your accountant approves, then let's do ow-fin.
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Justin Hroch
OP
Real Estate Agent · Austin, TX · Member since 2018 · 8 posts · 5 votes
4y
@Michael Plaks thanks a ton for the advice and caution. This is what I was thinking but wanted to at least get a few other opinions.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
4y
"Seller financing may provide you some tax savings and allow you to pay taxes over a period of time. However, you should confirm with your accountant. If you do not have an accountant, I can refer you to a couple of accountants.'
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