Seller Financing Taxes

[Mikhael Brown]

Hey guys. I am negotiating a seller  financing deal with a property owner,who inherited a home after his mothers passing. House has no mortgage. He likes the idea of seller fiancing but in not sure how it will be taxed if je received monthly payments since he lives in California and the property is in Indiana. He is also wondering if the taxes would be less if he just sells the property outright. It has been almost a year since his mothers passing. Does anyone have experience wirh this?

[Kory Reynolds]

His only income on the sale of this property would be the difference between the selling price and what the FMV was as of his mother's passing - is there really that much appreciation here?

Seller financing allows what is called Installment Sale reporting for IRS purposes.  Very simply - collect x% of the proceeds in a given year, recognize x% of what will be the total gain.  The gain is recognized proportionately over the life of the note.

If he will recognize more tax or not is going to be dependent on his own fluctuating income tax brackets over the he is collecting on the note and recognizing gain.  He'll also be collecting (and paying tax on) interest income.

If I didn't have much gain to recognize, I know as a seller I would rather just get all my tax, pay the gain, and not have the risk or hassle of a seller financing note.  If those are the only buyers  he can find, or I can get a premium for it, maybe do the seller financing.  But with a single family home, demand is still quite high.