What is seller financing?
Seller financing means you act as the bank. Instead of getting all your money at closing, the buyer usually pays you a down payment and then makes payments to you over time, usually with interest, under a written agreement.
For taxes, this kind of sale is often an installment sale. The IRS defines an installment sale as "a sale of property where you receive at least one payment after the tax year of the sale." Under the installment method, you may be able to report part of your gain as you receive each payment, rather than all of it in the year you sell.
That can spread capital gains over several years. Whether it helps you depends on your own tax picture, so talk to a tax professional before you agree to any terms.
How an installment sale can spread out capital gains
IRS Publication 537 explains that each payment you receive on an installment sale usually has three parts:
- Interest income, which is generally taxed as ordinary income.
- Return of your adjusted basis (the part of your investment you're getting back).
- Gain on the sale.
To figure how much of each payment is gain, the IRS uses a gross profit percentage. Your gross profit is the selling price minus your installment sale basis, and the gross profit percentage is your gross profit divided by the contract price. Each year, you multiply the payments you receive (not counting interest) by that percentage.
A simplified example.
Say you sell a house for $200,000 with no mortgage for the buyer to take over, and your installment sale basis is $120,000. Your gross profit is $80,000, so your gross profit percentage is 40%.
If the buyer pays $20,000 down in the year of sale, $8,000 of that is reported as gain that year. As later principal payments come in, 40% of each one is gain. Interest is reported separately.
This example leaves out selling costs, depreciation and other details on purpose. Your numbers will be different, and a tax professional should run them.
You report an installment sale on Form 6252, in the year of the sale and in each later year you receive payments, according to IRS Topic 705.
What the installment method doesn't cover
Seller financing does not make the tax go away, and some parts of the gain can't be spread out. According to IRS Topic 705 and Publication 537:
- Depreciation recapture. If you took depreciation on the property, for example on a rental, the recapture income has to be reported in the year of sale, even if you receive no payment that year.
- Interest. The interest the buyer pays you is generally ordinary income.
- Low or no interest. If the contract doesn't provide adequate stated interest, part of the principal may be treated as interest instead, figured using the IRS applicable federal rate.
- Losses. The installment method can't be used for a sale that results in a loss.
- Opting out. The installment method applies unless you elect out. If you elect out, you generally report the entire gain in the year of sale.
There are more rules than this page can cover. Talk to a tax professional about your specific situation before you sign.
The trade-offs of seller financing
Seller financing can work well, but it's not right for everyone. Be honest with yourself about these risks:
- The buyer could stop paying. If that happens, you may have to take the property back. Publication 537 has special rules for repossessing real property, and the tax side can get complicated.
- You wait for your money. You won't have the full sale price at closing. If you need cash soon for another home, medical bills or debts, a cash sale may fit better.
- You still have paperwork. You'll want a properly written note and mortgage or deed of trust, and you'll need to track payments for years.
- Your existing mortgage matters. If you still owe money on the house, ask your lender and a real estate attorney before you agree to seller financing.
Cash sale, seller financing or listing: your options
| Option | Works best when | Trade-offs |
|---|---|---|
| List with an agent | The house is in good shape and you have time | Repairs, showings, commissions, and the full gain is generally reported in the year of sale |
| Sell to us for cash | You want your money at closing and a fast, as-is sale | The full gain is generally reported in the year of sale, and it usually nets less than a retail sale of a house in good shape |
| Sell to us with seller financing | You don't need all the cash now and want payments over time | Risk of buyer default, waiting for your money, and more paperwork |
To be fair to you: if the house is in good shape and you have time, listing with an agent will usually bring more money than a cash sale. A cash or terms sale makes more sense when the house needs work, you want a set closing date, or you'd rather not deal with repairs and showings.
A cash offer or a terms offer from BigBuck Offers
We can make you a cash offer, and we can also make a seller-financed offer (often called a terms offer), where we pay part at closing and the rest over time. You can compare the two side by side.
Either way, we buy as-is, with no repairs, no cleaning, and no fees or agent commissions. The details of a terms offer, such as the down payment, interest rate and length, are agreed on in writing before anything is signed.
Seller financing can also fit rentals and inherited houses. If that's your situation, see selling a house with tenants in place or selling an inherited house. If you're behind on payments, read how selling can help stop a foreclosure first, since seller financing may not fit when time is short.
How selling to us works
- Tell us about the house. Use the form or call 1-844-348-9268.
- Get a cash offer, usually the same day we have the property details. Ask about a terms offer too.
- Pick your closing date, as soon as 7 days.
You can request a cash or terms offer using the form at the top of this page.
FAQ
Do you pay capital gains tax on a seller-financed sale?
Usually, yes, but with an installment sale you may be able to report the gain as payments come in instead of all at once. Depreciation recapture is reported in the year of sale.
What are the tax benefits of seller financing?
The main one is that an installment sale can spread your gain over the years you receive payments. Whether that lowers your total tax depends on your situation, so ask a tax professional.
What happens if the buyer stops paying?
You may have to take the property back. IRS Publication 537 has special rules for repossessing real property, so talk to an attorney and a tax professional.
Is the interest I receive taxed?
Yes. The IRS says interest on an installment sale is generally reported as ordinary income.
Can BigBuck Offers make me a seller-financed offer?
Yes. We can make a terms offer as well as a cash offer, so you can compare them.
This page is general information, not legal or tax advice.
