CPA Question: Sale Vs. Seller Finance

[Nick Buten]

Hello, I’m hoping there is a CPA in BP who can help me explain the 2 scenarios below to a seller.

***The seller has no debt on the property

Offer 1: $375,000 (Bank Financing)

Offer 2: $375,000 (Seller Financing)

- 10% Downpayment ($37,500)

- Loan Amount: $337,500

- 3 Year Term

- 5% Annual Rate

- Guarantee 2 years of IO payments ($16,875 each year so $33,750 total)

Can someone explain the differences in taxes the seller would pay on Offer 1 Vs. Offer 2? I’m hoping to be able to explain that seller financing is not only beneficial from a total return amount but also from a tax perspective (maybe it is not)? Thanks

[Ashish Acharya]

Originally posted by @Nick Buten:

Hello, I’m hoping there is a CPA in BP who can help me explain the 2 scenarios below to a seller.

***The seller has no debt on the property

Offer 1: $375,000 (Bank Financing)

Offer 2: $375,000 (Seller Financing)

- 10% Downpayment ($37,500)

- Loan Amount: $337,500

- 3 Year Term

- 5% Annual Rate

- Guarantee 2 years of IO payments ($16,875 each year so $33,750 total)

Can someone explain the differences in taxes the seller would pay on Offer 1 Vs. Offer 2? I’m hoping to be able to explain that seller financing is not only beneficial from a total return amount but also from a tax perspective (maybe it is not)? Thanks

If this is seller’s primary residence, than there might be no taxes. 

If not,

1) entire gain is taxed. 

2) only gain on yearly payments is taxed. The capital gain is spreads over the term of the loan. Total payments for a year is divided between principle, cap gain, and interest income.