Seller Financing and Taxes for the Seller

[Rory Compton]

I’m curious how the taxes work for the seller. If they are owner occupiers then they won’t have capital gains anyways. So in that case it is really just the income stream they can maintain.

But, if they are tired landlords, how does it effect capital gains and depreciation recapture? Both on the down payment, and the principle/interest?

[Ashish Acharya]

Originally posted by @Rory Compton:

I’m curious how the taxes work for the seller. If they are owner occupiers then they won’t have capital gains anyways. So in that case it is really just the income stream they can maintain.

But, if they are tired landlords, how does it effect capital gains and depreciation recapture? Both on the down payment, and the principle/interest?

When the gain from an installment sale of depreciable real property consists of both unrecaptured Section 1250 gain (25%-rate gain) and adjusted net capital gain, the taxpayer recognizes 25%-rate gain as payments are received before recognizing any adjusted net capital gainThis “front-loaded” allocation method is consistent with IRC § 1(h)(3)

So depending on the amount of down payment, all the recapture might happen in the first year.