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Seller Financing Interest Income: How to Report It (Schedule B, 1098)

By Hans Goldstein · Updated 2026-09-27

Interest you receive on a seller-financed note is ordinary income, taxed in the year you receive it, and reported on Schedule B (Form 1040). If the buyer lives in the property, you list that interest first on Schedule B line 1 with the buyer's name, address and Social Security number, and you give the buyer your SSN. As an individual who sold your own property, you generally do not file Form 1098. The principal portion of each payment is reported separately, on Form 6252.

This article is the reporting side of seller financing. For choosing the rate, see seller financing interest rate; for the gain side, see seller financing tax implications.

How seller financing interest is taxed

That last row surprises people. California's Pub. 1100 example: a nonresident who sold a California rental on installments still owes California tax on the capital gain portion, but "the interest income is not taxable by California and has a source in your state of residence."

Splitting each payment: interest, gain and basis

Every payment on the note divides three ways:

1. Interest: unpaid balance x periodic rate. Ordinary income.
2. Principal: gain: principal x gross profit percentage. Capital gain (or recapture already taxed in the year of sale).
3. Principal: return of basis: the rest. Not taxed.

Simple example. Assumptions: $400,000 note at 7%, 30-year amortization, monthly payments of $2,661.21. Gross profit percentage 60%.

In the early years of an amortizing note, interest dominates. What it costs: assuming married filing jointly and $150,000 of other taxable income, 2026 federal tax on the $27,871 of interest is about $6,132. With $300,000 of other taxable income (and assuming MAGI equals taxable income), it is about $6,689 of income tax plus $1,059 of net investment income tax. (Computed on 2026 MFJ brackets; state tax excluded.)

Build the schedule once, at closing, and keep it with your tax records. A loan servicer will produce it for you, or run your terms through the seller financing calculator.

Schedule B: the buyer's SSN rule

The Schedule B instructions say you must file Schedule B if "you received interest from a seller-financed mortgage and the buyer used the property as a personal residence," even if your total interest is under the usual $1,500 threshold.

On line 1: "list first any interest the buyer paid you on a mortgage or other form of seller financing. Be sure to show the buyer's name, address, and SSN. You must also let the buyer know your SSN. If you don't show the buyer's name, address, and SSN, or let the buyer know your SSN, you may have to pay a $50 penalty."

The buyer's side. The buyer deducts qualified home mortgage interest on Schedule A line 8b and must show your name, address and TIN there (Pub. 936). The IRS suggests exchanging Form W-9 for this. Get it done at closing, in the escrow file, so you are not chasing a buyer for an SSN in April.

If the buyer is not using the property as a home (a rental, land or a business), you still report the interest on Schedule B (or Schedule E or C if it belongs there for your situation), without the special listing requirement.

Do you need to file Form 1098?

Usually not. The Form 1098 instructions require it from a person who receives "$600 or more of mortgage interest" from an individual "in the course of your trade or business." They continue: "You are not required to file this form if the interest is not received in the course of your trade or business. For example, you hold the mortgage on your former personal residence."

The instructions also give the line-drawing example: a real estate developer that finances homes it builds must file, even though it is not a lender; a physician who finances the sale of his own home need not.

Form 1099-INT runs the other way: it is filed by a payer. A buyer that is a business and pays you $600 or more of interest in the course of its trade or business may be required to issue you a 1099-INT. Either way, you report the full interest you received, whether or not you get a form.

Imputed interest and OID

If your note charges less than the applicable federal rate, part of each principal payment is treated as interest under §483 or §1274. That imputed amount is also reported as interest income, not on Form 6252, and under §1274 it may have to be accrued each year before you receive it. See imputed interest. This is the most common reporting error on family and low-rate notes.

Form 6252 and interest: keep them separate

Form 6252 reports the sale and the gain portion of principal each year. It does not include interest. A frequent mistake is entering the total payments received on Form 6252, which overstates the gain and understates interest. Enter only principal (and any payments treated as principal) on Form 6252, and interest on Schedule B.

Estimated tax on note interest

No one withholds on your note payments. Interest plus the gain portion of principal can create a balance due and an underpayment penalty. Most sellers either make quarterly estimated payments or raise withholding on wages or retirement distributions. If the sale happened late in the year, the annualized income installment method can reduce or remove the penalty for the earlier quarters.

Year-end checklist for the seller

• Total interest received for the year, by note, from the amortization schedule or servicer ledger.
• Principal received, split into gain and basis at your gross profit percentage.
• The buyer's name, address and SSN if the property is their home, and proof you gave them yours.
• Any imputed interest or OID for the year.
• Late fees collected (ask your CPA how to treat them).
• Any 1099-INT received from a business buyer, reconciled to your records.

Bottom line

Seller financing interest is ordinary, portfolio, net-investment income taxed by your state of residence. Report it on Schedule B, listing the buyer's name, address and SSN when they live in the property, and keep it out of Form 6252. An individual selling their own property generally does not file Form 1098. Build the amortization schedule at closing and your reporting becomes routine. For more on how the whole payment stream works, see how seller financing works or model it in the calculator.

Questions to ask your CPA

• How much of this year's payments is interest, taxable gain and return of basis?
• Am I required to file Form 1098, given how I hold the note?
• Does my note have imputed interest or OID I need to report?
• How is the interest taxed by my state, and by the state where the property is?
• What estimated tax payments should I make to avoid an underpayment penalty?

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.