Tax Benefits of Seller Financing

Tax, SDIRAs & Cost Segregation
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Tax Benefits of Seller Financing

Mike GriffinPro Member
Investor · Greater Boston, MA · Member since 2019 · 77 posts · 9 votes

Hello! I am in discussions with a seller and I’m pitching seller financing. The seller wants $1.8M and they own outright, for decades. It’s in southern Maine. 
What tax benefits can I spell out for them? They’ll lose a big chuck in taxes from a traditional sale. But monthly income will be taxed less? Anything else?

Thank you!

Mike

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y

@Mike Griffin

First - you should not sell (or "spell out") ANY tax benefits to sellers. You can only suggest that they discuss it with they own tax advisor - because everyone's tax situation is unique, as are everyone's goals, financial literacy, family complications and whatnot.

The ONLY correct advice is: "from what I heard, you MIGHT have substantial tax benefits by agreeing to owner-finance it to me - but please consult your own tax advisor."

That said, I expect you to ignore my suggestion and proceed "educating" this seller anyway. At least read these discussions: 
https://www.biggerpockets.com/forums/51/topics/717818-tax-be...
https://www.biggerpockets.com/forums/51/topics/1054266-tax-i...
https://www.biggerpockets.com/forums/51/topics/1069885-poten...

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  • Dan WeberBusiness Member
    Realtor · Portland, ME · Member since 2015 · 656 posts · 552 votes
    3y

    Hey @Mike Griffin, here are some ideas:

    • -Potentially higher sales price because they are flexible on terms
    • -Faster sale
    • -Residual monthly income that can act as an income stream in retirement At 5% interest amortized over 30 years, the seller would make $90k in interest just in the first year.
    • -They are taxed on a lower amount because the annual income is less than the lump sum
    • -The property is collateral for them. If you stop paying then they get the property back, which they know extremely well because they’ve owned it for so long.

    Good luck!

    3Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Mike Griffin

    I would say absolutely zero

    1. A property with that much value they should 1031 into a new property

    2. Interest income is ordinary income

    3. If the borrower were to default Maine is one of the worst states for foreclosure. It will take 3-5 years to foreclose and during that time the lender will be paying property taxes and insurance on it while the borrower can live for free…

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  • Account Closed
    CPA · NY · Member since 2023 · 891 posts · 157 votes
    3y

    Seller financing can offer several benefits for both parties involved. Here are some potential tax advantages that you can highlight for the seller:

    1. Capital Gains Tax Deferral: By spreading the payments over time through seller financing, the seller may be able to defer a portion of the capital gains tax that would be incurred in a lump-sum sale.
    2. Income Tax Spread: Instead of receiving a large sum of money all at once, the seller will receive payments over time. This can potentially result in a lower tax rate on the income received, as it falls into different tax brackets.
    3. Interest Income: If the seller charges interest on the financed amount, they can earn interest income over time. This interest income may be taxed at a potentially lower rate than capital gains.
    4. Estate Planning Benefits: Depending on the seller's overall financial situation and estate planning goals, spreading out the receipt of funds can be advantageous for minimizing estate taxes.
    5. Installment Sale Reporting: If the seller chooses the installment sale method for reporting the sale, they may be able to spread the recognition of the gain over the term of the financing, potentially reducing the impact of the capital gains tax.
    6. Flexible Terms: Seller financing allows for flexibility in negotiating terms, potentially allowing the seller to structure the deal in a way that optimizes their tax situation.
    2Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    3y

    @Mike Griffin

    First - you should not sell (or "spell out") ANY tax benefits to sellers. You can only suggest that they discuss it with they own tax advisor - because everyone's tax situation is unique, as are everyone's goals, financial literacy, family complications and whatnot.

    The ONLY correct advice is: "from what I heard, you MIGHT have substantial tax benefits by agreeing to owner-finance it to me - but please consult your own tax advisor."

    That said, I expect you to ignore my suggestion and proceed "educating" this seller anyway. At least read these discussions: 
    https://www.biggerpockets.com/forums/51/topics/717818-tax-be...
    https://www.biggerpockets.com/forums/51/topics/1054266-tax-i...
    https://www.biggerpockets.com/forums/51/topics/1069885-poten...

    4Reply
  • Nate MeekerBusiness Member
    Real Estate CPA | California · Member since 2020 · 544 posts · 251 votes
    2y

    @Mike Griffin you could reference this IRS page https://www.irs.gov/taxtopics/tc705 

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    1Reply
  • Michael K.
    Investor · Boston, MA · Member since 2024 · 16 posts · 2 votes
    2y

    I love southern Maine! I've been trying to York or OGT for a while. Hope it worked out for you. 

    0Reply
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