Owner Financing: Tax Implications for Seller

[Anthony Jordan]

Hey BP, 

I'm looking to make an offer to buy a single family home using owner financing and want to get a better understanding of what the tax implications are to the seller. My initial thought is that the seller would have to treat this transaction as a sale of property and recognize any long-term capital gain recognized from the deal at the time of the transaction. (100% gain recognized up front, assuming no 1031 exchange is utilized). In addition, the seller will have to recognize any interest income they receive from me (the buyer) over the life of the loan. 

What have you experienced when selling property via owner financing and what are the tax benefits and consequences of doing so? 

Thank you for any and all input in advance. 

[Michael Plaks]

@Michael Temple and @Joe Splitrock - sorry gentlemen, you're incorrect.

Depreciation recapture is NOT due in the year of sale, which is a very common misunderstanding, even between CPAs. I know of one prominent CPA who has it posted on his website. Wrong.

It is spread over the installment sale life, but it has to be taken before the appreciation/cap gain component.