CPA Question: Sale Vs. Seller Finance

4 Replies

Hello, I’m hoping there is a CPA in BP who can help me explain the 2 scenarios below to a seller.

***The seller has no debt on the property

Offer 1: $375,000 (Bank Financing)

Offer 2: $375,000 (Seller Financing)

- 10% Downpayment ($37,500)

- Loan Amount: $337,500

- 3 Year Term

- 5% Annual Rate

- Guarantee 2 years of IO payments ($16,875 each year so $33,750 total)

Can someone explain the differences in taxes the seller would pay on Offer 1 Vs. Offer 2? I’m hoping to be able to explain that seller financing is not only beneficial from a total return amount but also from a tax perspective (maybe it is not)? Thanks

Originally posted by @Nick Buten :

Hello, I’m hoping there is a CPA in BP who can help me explain the 2 scenarios below to a seller.

***The seller has no debt on the property

Offer 1: $375,000 (Bank Financing)

Offer 2: $375,000 (Seller Financing)

- 10% Downpayment ($37,500)

- Loan Amount: $337,500

- 3 Year Term

- 5% Annual Rate

- Guarantee 2 years of IO payments ($16,875 each year so $33,750 total)

Can someone explain the differences in taxes the seller would pay on Offer 1 Vs. Offer 2? I’m hoping to be able to explain that seller financing is not only beneficial from a total return amount but also from a tax perspective (maybe it is not)? Thanks



If this is seller’s primary residence, than there might be no taxes. 

If not,

1) entire gain is taxed. 

2) only gain on yearly payments is taxed. The capital gain is spreads over the term of the loan. Total payments for a year is divided between principle, cap gain, and interest income.

No tax benefits in this case at all.

Assuming this is an investment property for seller....

1) ordinary interest income for the first two years

2) Full cap gains and depreciation recapture in year three when paid off

@Nick Buten

If the seller has an offer and the buyer is using bank financing - normally the seller receives all cash at time of closing. That means all the gain is calculated in year of sale.

Seller financing normally implies that a portion of the sales price is received in a year after the sale. As a result gain is calculated in chunks.
There is also an interest income component every year.

In general - you should have the seller consult his/her CPA. There are certainly a lot of moving pieces and you don't want to give incorrect advice.