Seller Financing Example: Payments, Interest and the Seller's Tax
Want the numbers for your own deal? Use the free seller financing calculator: payment, amortization, balloon and the seller's tax each year.
A seller financing calculator should answer two questions, not one: what the buyer pays you each month, and what you owe in tax each year. The payment is simple loan math. The tax follows IRC §453: each dollar of principal carries the same percentage of taxable gain, interest is ordinary income every year, and a balloon payment can pull most of your gain into a single year.
Most "owner financing calculators" stop at the payment. This page walks through both halves, shows a full worked example, and explains the inputs our free calculator asks for so you can run your own numbers.
How to use the calculator: the inputs
Here is what each input means and why it matters for your tax, not just the payment.
| Input | What it is | Why it matters for tax |
|---|---|---|
| Sale price | Total price, including any debt the buyer assumes | Starts the gross profit and contract price math |
| Down payment | Cash you receive at closing | Taxed in the year of sale at your gross profit percentage |
| Note amount | Price minus down payment (and minus any assumed loan) | The principal you collect over time |
| Interest rate | The note's stated rate | Must be at least the AFR; interest is ordinary income |
| Amortization | Years used to compute the payment (for example 30) | Sets how much principal you receive each year |
| Balloon (term) | Year the remaining balance comes due (for example 5) | Principal in the balloon is taxed that year |
| Adjusted basis | What you paid, plus improvements, minus depreciation | Lower basis means more gain per dollar |
| Selling expenses | Commissions, legal fees, closing costs you pay | Added to basis for the gross profit percentage |
| Depreciation taken | Total depreciation on a rental | Decides the unrecaptured §1250 layer (up to 25%) and any year-one recapture |
Two inputs change the tax the most and are the easiest to get wrong: depreciation and any loan paid off at closing. A mortgage the buyer's money pays off at closing counts as a payment to you in year one, even though you never touch the cash (Temp. Reg. §15a.453-1(b)(3)(i)). Only debt the buyer actually assumes, up to your basis, is left out.
The payment math
The monthly payment on a seller-financed note uses the same formula as any mortgage:
Payment = Loan x r / (1 - (1 + r)^-n)
where r is the monthly rate (annual rate divided by 12) and n is the number of monthly payments in the amortization.
Simple example: $480,000 at 7% amortized over 30 years. r = 0.07 / 12 = 0.005833. n = 360. Payment = $3,193.45 a month. Amortized over 15 years instead (n = 180), the payment is $4,314.38.
A balloon does not change the monthly payment. It changes when the rest of the principal arrives. With a 5-year balloon on that 30-year schedule, the buyer owes about $451,832 at the end of year five. More on seller financing balloon payments.
What the results mean: a worked example
Simple example, all numbers illustrative. A married couple sells a small rental building.
- Sale price $600,000. Down payment $120,000 (20%). Seller note $480,000 at 7%, 30-year amortization, 5-year balloon.
- Original cost $400,000, straight-line depreciation taken $150,000, so adjusted basis $250,000.
- Selling expenses $36,000. No loan on the property.
Step 1: gross profit percentage. Installment basis = $250,000 + $36,000 = $286,000. Gross profit = $600,000 - $286,000 = $314,000. With no assumed debt, the contract price is the full $600,000. Gross profit percentage = $314,000 / $600,000 = 52.33%. Every dollar of principal you receive carries about 52 cents of taxable gain. (The gross profit percentage guide covers debt and recapture cases.)
Step 2: the schedule. Payments start the month after a January closing, so year one has 12 payments.
| Year | Interest received | Principal received | Gain recognized | Unrecaptured §1250 (up to 25%) | Long-term gain |
|---|---|---|---|---|---|
| 1 | $33,446 | $124,876 (down payment + $4,876) | $65,352 | $65,352 | $0 |
| 2 | $33,093 | $5,228 | $2,736 | $2,736 | $0 |
| 3 | $32,715 | $5,606 | $2,934 | $2,934 | $0 |
| 4 | $32,310 | $6,012 | $3,146 | $3,146 | $0 |
| 5 | $31,875 | $458,278 ($6,446 + $451,832 balloon) | $239,832 | $75,832 | $164,000 |
| Total | $163,439 | $600,000 | $314,000 | $150,000 | $164,000 |
Two rules shape that table. First, the $150,000 of depreciation comes out of the gain first, at a maximum 25% federal rate (Reg. §1.453-12). Second, the balloon carries almost all of the principal, so it carries almost all of the gain.
Step 3: the tax. Assume the couple has $90,000 of other ordinary income each year plus the note interest, files jointly, takes the standard deduction, and 2026 federal brackets hold flat (Rev. Proc. 2025-32). The rental gain and the interest count as net investment income.
| Year | Federal income tax on the gain | 3.8% NIIT on the gain | Total |
|---|---|---|---|
| 1 | $13,422 | $0 | $13,422 |
| 2 | $328 | $0 | $328 |
| 3 | $352 | $0 | $352 |
| 4 | $378 | $0 | $378 |
| 5 | $40,171 | $4,245 | $44,415 |
| Total | $58,895 |
The interest is taxed separately as ordinary income every year (about $163,000 of it over five years in this example).
Balloon vs fully amortizing: the tax difference
This is the part most seller financing calculators never show. Same sale, same couple, three ways to get paid (simple example, federal only, tax on the gain only):
| How you are paid | Federal tax on the gain | Where the gain lands |
|---|---|---|
| All cash at closing | $59,152 | All $314,000 in year one, including $5,852 of NIIT |
| 30-year schedule, 5-year balloon | $58,895 | $239,832 in year five |
| 15-year note, fully amortizing | $24,263 | $10,000 to $26,000 a year after year one |
The balloon note saves almost nothing on the tax. It delays the bill, then drops it into year five. The fully amortizing 15-year note spreads the gain thinly enough that the long-term gain stays inside the 0% bracket ($98,900 of taxable income for a joint return in 2026) and the NIIT never applies.
That is the core idea behind every installment sale: the tax depends on how much gain lands in each year, not on the total. Spreading helps only if each year's slice stays in lower brackets.
The trade-off is real. A 15-year note means 15 years of buyer risk, collection work and a longer wait for your money. A balloon forces a refinance, and if the buyer cannot refinance, you have a default instead of a payoff. See seller carry back risks and what happens if the buyer defaults or pays early.
Picking a rate: the AFR floor
You and the buyer negotiate the rate, but the tax code sets a floor. If the note's rate is below the applicable federal rate (AFR) for its term, part of your principal is recharacterized as interest under §483 or §1274. That turns some low-taxed capital gain into ordinary income, and in some cases you owe tax on interest before you receive it.
The AFR depends on the note's term: short-term for 3 years or less, mid-term for over 3 and up to 9 years, long-term for over 9 years (§1274(d)(1)). The IRS publishes the rates monthly; find the current table on the IRS applicable federal rates page. Our full guide: seller financing interest rate and the AFR minimum.
The 7% in this example is a round number chosen for the math. It is not a quote or a recommendation. Once you settle the terms, they go into the purchase contract through a seller financing addendum.
Seller financing vs cash vs a structured sale
The main calculator compares three ways to sell side by side:
- Cash sale. All gain taxed in the year of sale. No credit risk.
- Seller financing. You hold the buyer's note, secured by the property. You earn the note rate and carry the buyer's risk of default and early payoff. It pays no commission to anyone.
- Structured installment sale. The buyer pays in full at closing, and an assignment company pays you on a fixed schedule, usually funded by a fixed annuity it owns (some programs use a funding agreement). You are an unsecured creditor of the assignment company, the payments cannot be accelerated or borrowed against, a commission is built into the pricing, and no IRS ruling specifically approves the structure.
The tax mechanics under §453 are the same for both installment options. The differences are who owes you and what can go wrong. Details: seller financing vs a structured sale.
Assumptions and limits
Any calculator is a model. Know what this one assumes:
- Federal brackets held flat at 2026 levels. Real brackets adjust for inflation, and Congress can change rates.
- Married filing jointly, standard deduction unless you change the inputs.
- Ordinary recapture (§1245 on 5- and 7-year cost segregation parts and equipment, plus §1250(a) recapture of bonus or accelerated depreciation on 15-year land improvements) is taxed in full in the year of sale regardless of payments (§453(i)). If you did a cost segregation study, enter it, or the year-one tax will be understated.
- Unrecaptured §1250 gain comes out first from each payment (Reg. §1.453-12).
- The buyer pays exactly on schedule. No default, no prepayment. In real life either one changes your tax.
- Interest is ordinary income and is shown separately from tax on the gain.
- Not modeled: the §453A interest charge on notes over $5 million outstanding at year end, the §1231 five-year lookback, state-specific rules, Medicare IRMAA, and passive loss limits unless you enter them.
The IRS rules behind the numbers are in Publication 537, Installment Sales, and you report each year on Form 6252. Our walkthrough: Form 6252 instructions, line by line.
At tax time, the interest part of each payment goes on Schedule B; see seller financing interest income reporting.
Bottom line
The payment is the easy number. The tax depends on how the principal arrives: a balloon pulls most of the gain into one year, while a fully amortizing note spreads it and can keep more of it in the 0% and 15% brackets. Run the schedule and the tax together before you agree to terms. Start with the seller financing tax guide and then open the calculator.
Questions to ask your CPA
- What is my adjusted basis, and how much depreciation (including any cost segregation) will come back as year-one recapture?
- Will any loan be paid off at closing, and how much year-one gain does that create?
- What AFR applies to this note's term in the month we sign the contract?
- With my other income, how much gain can I recognize each year and stay in the 0% or 15% bracket and under the 3.8% line?
- If the buyer refinances and pays off the balloon early, what is my tax that year?
- How does my state tax each year's gain and interest?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.