How Do Capital Gains Taxes Work on Seller Financing?

[Mindy Jensen]

A friend is considering selling a duplex purchased at the bottom of the market. They're not interested in a 1031 Exchange, they want to sell and be done with investment properties.

They are not opposed to seller financing. How do capital gains taxes work when you hold the note?

@Natalie Kolodij @Linda Weygant @Amanda Han @Steven Hamilton II

[Linda Weygant]

Great question.

If you sell and hold the note, the capital gains are spread over the life of the note.  (Note the Depreciation Recapture occurs all in the year of title transfer and is not spread).

With some smart planning and a really good understanding of future income sources and amounts, you can possibly push the capital gains down to $0 since there is a 0% tax bracket available when all income sources are down below certain dollar amounts.

Interest Income is taxed separately outside of the gain, but would be included for purposes of calculating total income (in order to get that gain down into the 0% bracket)