CPA Question: Sale Vs. Seller Finance

Tax, SDIRAs & Cost Segregation
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CPA Question: Sale Vs. Seller Finance

Nick Buten
Rental Property Investor · Newport, KY · Member since 2017 · 3 posts · 1 vote

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

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
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. 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    5y
    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. 

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
    WebsiteView Page
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  • Eamonn McElroy
    Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    @Nick Buten

    Are you prepared to absorb the liability of advising on tax consequences, to a transaction of which you have adverse economic interest?

    Tell her you're flexible, and encourage her to consult independent tax advisors.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    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

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @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.

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