Capital gains on seller financed sale

[Ivan Smith]

I'm reaching out to everyone I know and I'm not getting much of a solid answer. I need to make a decision whether to sell house in az via seller financing and need to respond to offer by tonight. The market is dropping out in az so we are getting only offers where buyers are asking for seller financing. So we are still within that 5 year rule where we lived there for 2 of the last 5 years and wouldn't have to pay capital gains if we sell it now.

So the question is if we do seller financing with this structure would we pay capital gains on interest payments for the next 5 years and when they make balloon payment would we have to pay capital gains on the balloon payment. Technically there would be a deed of trust and promissory note and sale is recorded as a sale but we just become the bank. So in a sense we shud be able to satisfy that rule but the balloon payment wouldn't come for 5 to 7 years. So we bought it for 350 or so and added improvements inside and back yard so there would be about 350 of equity that would be taxed for cap gains purposes. But house is paid off and we would get a big chunk of money when balloon payment is made. Minus the down payment of 108k.

This is the deal:

House is listed for 700k. Purchase price is 725k , buyer pays 108k as down payment. Then they pay us 5% as interest only till the Ballon payment after year 5. There is however a clause that they can extend for 2 more years on same terms if property isn't appraised at what it is at time of sale.

I don't know if seller financing is a good deal but if they do Interst only for 5 years then we get over 900k for the house over all.

But will we have to pay cap gains on balloon payment and would it be purchase price minus what we bought it originally minus improvements minus down payment = amount we have to pay cap gains on when ballon payment is made? I think the monthly interst will be taxed as ordinary income.

Also is there an issue if the buyer is an llc and it would be investment property. Will there be an issue with foreclosing on LLc in Arizona?

Please let me know. Any feedback appreciated thanks

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