How is the interest gains from seller financing taxed?

Question

I am wondering if the interest from a seller financed property is taxed as your income rate or as some sort of capital gains since it is result of the property sale?

Albert Bui · Answer

Interest is short term income capital gains or ordinary yes and the gain on sale upon exiting the note or selling the note is or can be long term cap gains if its 12+ months but you're in CA right? CA taxes capital gains as regular income so there you go, another 9.3-13.3% on top of the federal rates.

If you work with a good CPA you can have strategies for tax reduction ( I am not a tax pro) to be interwoven into your investing

Basit Siddiqi · Answer

Seller finance results in 3 buckets of payments

Return of capital
Capital gain - Potential depreciation recapture and net investment income tax concerns
Interest income

Interest income is added to your other income and there is no preferred tax rates for interest income.

Andrew Postell · Answer

@Yourri-Samuel Dessureault I'm going to defer this to your CPA (Bigger Pockets might even have a better tax based forum for this question) but most people will claim their interest on the "Schedule B" portion of their personal tax returns. You didn't ask about capital gains but interest...and that's in Schedule B if you are claiming this under your personal income. Hope that makes sense.

Yourri-Samuel Dessureault · Answer

Thank you both for your responses.

Wayne Brooks · Answer

Interest is ordinary income.

The principal payment gets divided into 3 different buckets...

-return of basis, no tax

-depreciation recapture, ordinary income up to 25% max

-cap gains, at a cap gain rate

Derek Dombeck · Answer

The interest portion of each payment is taxes at you ordinary income tax rate and the principal portion is taxes at capital gains rates

How is the interest gains from seller financing taxed?

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