Installment Sales, Seller Financing, and a Stepped Up Basis

[Paul Haviland]

Hi everyone - Looking for a few quick answers so as not to mislead a potential Seller. Is an installment sale (land contract) treated the same as seller financing (complete transfer of ownership with Seller carrying financing)? My understanding is they are treated the same for the seller- you pay Capitol gains when you receive the principal back. For example 10% down seller financed property with a 5 year interest only note/mortgage, the Seller will owe 10% of their total Capital gains the year they sell the building (and receive 10% down). They then pay the remaining 90% of cap gains tax when they receive the remaining 90% of the sales proceeds. All interest earned will just be taxed as interest income. The next question is regarding a stepped up basis upon inheriting a property. Let's say that instead of someone holding a property till the end, they sold it just before passing on via an installment sale. Would there still be cap gains due on the principal funds that haven't been returned to the Seller/heirs? Would they receive a stepped up basis on the value of the note? Thanks in advance for any help/info/direction you can provide.