IRS, Owner financing, and simple interest

[George P.]

Looks like the IRS dictates that the seller who sells on terms has to declare the minimum rate (I believe it varies but is around 3%). Which means that if you ask for and get a principal-only mortgage, the seller is going to have to pay income tax on interest he didn't receive, correct?

BUT... this got me thinking... Can't you offer 5% SIMPLE interest? So the $360,000 30-yr loan @ 5% simple interest would cost you $1,050 PI/month (360,000 / 30 years = 12,000. 12,000 x 1.05 / 12 = 1,050/mo payment - is this math correct?). Vs. financing @ 5% compound interest rate $1,932 PI/month.

Win-win-win for everyone involved: seller gets higher rate than bank's CD, buyer is saving almost 1k a month, and the IRS gets it's portion off $600/year interest.

Thoughts?....