Seller tax implications when Owner Financing

[Carl S.]

Hi All

I'm looking for clarity on the tax implications for a seller when owner financing. The seller I am dealing with only has one reservation on carrying a note and that is the tax implication. The details are as follows,

- Owner owns property free and clear (in Texas)

- Owner lives in New Jersey (income tax state)

- Properties are owned in his personal capacity

- Has owned properties for >20 years with depreciation so definitely Capital gains is applicable

- Financing 100% at 0% interest for 20 years (properties are vacant and need serious rehab, I will be investing around 25-35% in rehab's to get properties rented and therefore if I defaulted there would be equity in the properties for him)

What would the tax implications be on the monthly installment? Would he only be liable for the capital gain tax as there is no interest being earned?

Any assistance will be great appreciated

Thank you kindly

[Bill Gulley]

He's responsible for 25% of the recaptured depreciation, his gain on the sale is taxable as it is received in principal as a % of the payment and he will have interest income earned just as with any other interest at his tax rate. 

Now, to double check for you, @Brandon Hall :)