Tax benefits of 0% interest seller financing!

[Adam Scheetz]

One of the recent BP Podcasts I listened to made mention of a huge selling point that the guest used a lot. He said that when sellers say they want 2%, 5%, Etc, in interest on their seller financing, he reminds them that income received from principal payments on a seller financing deal is taxed at a lower rate that interest payments received. These have to be seperated when filing taxes. The benefit to the seller of foregoing the interest payments and doing just principal are significant because they save money on the back end when they file.

Thoughts?

[Ashish Acharya]

Originally posted by @Adam Scheetz:

One of the recent BP Podcasts I listened to made mention of a huge selling point that the guest used a lot. He said that when sellers say they want 2%, 5%, Etc, in interest on their seller financing, he reminds them that income received from principal payments on a seller financing deal is taxed at a lower rate that interest payments received. These have to be seperated when filing taxes. The benefit to the seller of foregoing the interest payments and doing just principal are significant because they save money on the back end when they file.

Thoughts?

1) Principle has two parts. He might be referring to the capital gain that is received with each payment/principle. Yes, cap gain is taxed at lower rate. 

Each payment to seller has 

A) Basis - Not taxed
B) Gain - Taxed at lower rate. Can include dep recapture. 
C) Interest - Taxed

2) There has to be an interest component in the seller financing, if not IRS will impute an interest income for the seller. Seller’s CPA will have to impute an interest if the contracts has no interest component. 

3) Yes, interest income is taxed at ordinary income higher rate.