A tax question about seller financing and private lending.

[Bob Jones]

Hi,

In the past, I've explored the possibility of selling homes with seller financing. To my great dismay, I discovered that if you do this too frequently, you'll be classified as a dealer. As such, you will have to pay taxes on the entirety of the note up front. Obviously, that would be a big inconvenience. 

I'm just exploring my options, and I had an idea. What if I sold a home, and then gave someone an unsecured private loan? If they stop making payments, I can then put a judgment on the house. 

I'm not saying I'm going to pursue this option. But, I'm just wondering if it would work. If I do this, will I be taxed on the money I make over the course of the year, as opposed to being taxed on the entirety of a note up front? 

[Kyle J.]

Originally posted by @Bob Jones:

@Kyle J.

Yeah, this is not ideal. I'm just brainstorming my options. Though, if they got a mortgage, wouldn't the lender be required to pay off my lien before the DOT is recorded?

In your example, you don’t have a “lien”. You have an unsecured note. How would another lender even know about it? If it’s unsecured, it’s essentially a piece of paper sitting in your file cabinet at home.