Potential Taxes on Seller Financing

[Justin Hroch]

Hi,

I have an opportunity to purchase a few duplexes via seller financing. I am in the process of conversations with the seller and I want to show them some of the benefits of an arrangement like this. My question is concerning tax liabilities the seller might incur by transferring title but holding the note. 

I know in a typical sell it triggers a tax liability for the seller. Is there any tax liability that happens when the seller holds the note on the property? Is it just the principal and interest paid during the year?

[Chris McCormack]

Benefits can include paying the taxes over time. A portion of the payments will be a return of basis, the other is attributable to capital gains. They'll pay capital gains tax on the amounts attributable to the gain. 

The one area they should concern themselves with is depreciation recapture which is due upon sale. If they've been depreciating the property over the course of its life, they'll be faced with a 25% tax on the recapture. 

Work with a tax strategist and you can come up with something that works well for both.