Selling a Owner/Seller Financed Note

[Ryan Crabtree]

Hi All, I'm trying to understand what the tax implications are for selling an owner/seller financed note. 

Here is an example of my situation: I acquired a 1 acre parcel for $15K. I spent another $5K in clean up, mowing, etc. My total basis is $20k. I sold the cleaned 1 acre lot for $40K via owner/seller financed. The terms were $5K down payment, 10% interest, amortized of 20 years, PI payment of $337 per month with balloon payment at the end of year 5. I have had this note for 15 months now. A group offer to buy my note at 95% of the remaining principal balance. (note I understand interest is tax at short term rates)

My question is how would this sale be tax? I'm assuming its long term capital tax rate on the gain. Since I create the note initially is there other tax implications I need to be aware of? 

 Thank you for your help!    

[Bob Norton]

@Ryan Crabtree You sold the original land as an installment sale, so that was your taxable event.  You had a $20k capital gain on the land that will be spread over the life of the note (using the IRS pro rata formula).  By selling the note at a discount, it will reduce the amount of capital gain that you received from your installment sale.  You will be taxed on the balance of the capital gain in the year that you sell the note.