Seller Financing vs Bank Financing: What Changes for the Seller
For the seller, the difference between seller financing and bank financing is when you get paid and who you depend on afterward. With a bank loan, the buyer's lender pays you in full at closing: your risk ends that day, and all the gain is taxed that year. With seller financing, you become the lender: the gain spreads over the years you collect principal under §453, and you earn interest, but you carry the buyer's default risk, early payoff risk and the servicing for years.
There is also a third path many sellers do not know about: the buyer uses a normal bank loan and pays in full, and you still spread the gain with a structured installment sale set up before closing. This page compares all three from the seller's side.
The short answer in one table
| Cash from a bank loan | Seller note (you carry the loan) | Bank loan + structured sale | |
|---|---|---|---|
| What you get at closing | The full price | The down payment | The full price is paid; you keep what you want in cash and the rest funds your schedule |
| Who owes you after closing | Nobody | The buyer | An assignment company |
| Gain taxed in year of sale | All of it | The down payment's share (§453) | The share on the cash you keep (§453) |
| Buyer default or foreclosure | Not your problem | Your problem | Not your problem |
| Early payoff | n/a | Buyer can refinance or sell, which accelerates your tax | Not possible |
| Interest rate you earn | Whatever you reinvest in | Usually higher | Usually lower |
| Servicing and paperwork | None after closing | Note, deed of trust, collection, tax and insurance tracking | Contract language and assignment documents before closing; nothing to collect after |
| Speed and deal risk | Appraisal, underwriting and lender approval can delay or kill the deal | Often faster; you set the terms | Same as a bank deal |
| Liquidity later | Full | Low: a note usually sells at a discount | None: the schedule is fixed |
The rest of this page walks through each row.
Price and speed: the case for seller financing
Seller financing can widen the buyer pool. Buyers who cannot qualify for a bank loan, whose credit is thin, or who want to close quickly may be able to buy from you when a bank would say no. That can support your asking price, and a buyer who needs your terms is often less aggressive on price. It is a common reason owners of land, small rentals and small businesses offer terms.
A bank deal adds the bank's process. The buyer's lender will want an appraisal, underwriting of the buyer, title work and sometimes environmental or business-valuation reports. If the appraisal comes in low, the loan shrinks and the deal has to be renegotiated or the buyer brings more cash. The payoff is certainty on closing day: once the loan funds, you are paid and done.
Seller financing moves the underwriting to you. You decide whether the buyer is creditworthy. There is no appraisal gate, but there is also no bank checking the buyer's income and history on your behalf. If you finance, ask for what a bank would: credit report, tax returns, bank statements and a real down payment.
Taxes: all at once, or as you are paid
This is where the two paths differ most.
A bank-financed sale is a cash sale for tax purposes. The bank pays the buyer's loan proceeds to you at closing. You have received the full price in the year of sale, so all of the gain is taxed that year. An installment sale requires at least one payment after the close of the tax year of the sale (§453(b)(1)), and a bank-funded closing has none.
A seller note is an installment sale. The buyer's own note is not treated as a payment when you receive it (Temp. Reg. §15a.453-1(b)(3)(i)). You report gain as principal comes in: each principal dollar carries the same share of gain, the gross profit ratio. See seller financing taxes.
What does not spread under either path:
- Depreciation recapture (§1245, and any §1250 excess) is taxed in full in the year of sale, cash or note (§453(i)). See installment sale depreciation recapture.
- Interest on a seller note is ordinary income each year.
- A large note can bring an interest charge. If more than $5,000,000 of installment obligations from the year's sales (each over $150,000) are outstanding at year end, §453A charges interest on the deferred tax.
- The note rate must be adequate. If it is below the applicable federal rate, part of the principal is recharacterized as interest (§§483, 1274). For a sale, the test rate is the lowest AFR in the three-month period ending with the month of the binding contract (§1274(d)(2)). The long-term AFR (terms over nine years) was 5.12% for September 2026 and 5.22% for October 2026. See the AFR table.
Simple example: year-one tax three ways
Simple example (illustrative). You sell for $1,000,000. Your adjusted basis is $400,000, so the gain is $600,000 and the gross profit ratio is 60%. No depreciation recapture and no mortgage to pay off. The buyer has $250,000 to put down. For illustration, apply a flat 23.8% federal rate (the 20% top capital gain rate plus the 3.8% net investment income tax); your real rate depends on your brackets. Closing is late in the year, so the first annual principal payment falls in the next tax year.
A. Bank loan. The bank lends $750,000, and you receive $1,000,000 at closing. All $600,000 of gain is taxed in year one.
B. Seller note. You take $250,000 down and carry $750,000 at 7% for ten years, $75,000 of principal a year plus interest on the declining balance.
C. Bank loan plus structured sale. The buyer pays $1,000,000 at closing with the same bank loan. You keep $250,000 in cash, and $750,000 funds a structured installment sale paying $75,000 of principal a year for ten years, at an illustrative 4.5% (actual payout rates are set when the structure is funded and reflect the commission built into pricing).
| A. Bank loan | B. Seller note | C. Bank loan + structured | |
|---|---|---|---|
| Cash in hand at closing | $1,000,000 | $250,000 | $250,000 |
| Gain taxed in year one | $600,000 | $150,000 | $150,000 |
| Federal tax in year one at 23.8% | $142,800 | $35,700 | $35,700 |
| Gain taxed each later year | $0 | $45,000 | $45,000 |
| Interest over ten years (before tax) | n/a | $288,750 | $185,625 |
| Who you depend on after closing | Nobody | The buyer | The assignment company |
The math: $250,000 × 60% = $150,000 of gain in year one, and $75,000 × 60% = $45,000 in each of the next ten years. Interest runs on balances of $750,000, $675,000 and so on down to $75,000, which add up to $4,125,000 of balance-years: 7% of that is $288,750 and 4.5% is $185,625.
B and C spread the gain identically. Spreading it can also keep more of it out of the top bracket and under the net investment income tax threshold in each year, which a flat-rate example does not show. The differences are the rate, and who is on the other side of the payments.
Risk: what you take on when you carry the note
With a bank loan, the buyer's credit is the bank's problem. With a seller note, it is yours.
- Default. If the buyer stops paying, you foreclose or repossess, which costs time and legal fees, and you get back a property the buyer may have neglected. Taking back real property has its own tax rules (§1038). See what happens if the buyer defaults.
- Early payoff. The buyer can refinance or resell, and a due-on-sale clause often forces a payoff on resale. When a note is paid off early, the remaining deferred gain is taxed in that year.
- Second position. If a bank lends first and you carry the rest, your lien is usually subordinate. In a default, the bank is paid from the property before you. A seller second is common and useful, but it is the riskiest place in the capital stack.
- Concentration. A note to one buyer is much less diversified than a bank's loan book.
Simple example, continued. In option B, the buyer refinances after three principal payments and pays off the remaining $525,000. At 60%, $315,000 of gain lands in that one year instead of $45,000 a year for seven more years.
Yield: note interest vs reinvesting the cash
A seller note usually pays a higher rate than a bank CD or a bond, and that is one of the real benefits of seller financing for the seller. Compare it honestly, though: the note's rate is paying you to take a single buyer's credit risk and to give up liquidity. A bank-financed sale lets you reinvest the whole price wherever you choose, but the reinvested amount is smaller because you paid the full tax in year one. The calculator runs both on your numbers.
Liquidity and paperwork
Bank financing: one closing, one check, nothing to manage afterward.
Seller financing: a promissory note, a deed of trust or mortgage, a recorded lien, title insurance, a servicing plan (or a servicing company), annual interest reporting, and tracking the buyer's property taxes and insurance. If you need cash later, you can sell the note, usually at a discount, and the sale triggers the deferred gain (§453B). The note value calculator shows what a note buyer might pay.
Spreading the gain when the buyer pays in full
Most sellers want two things that seem to conflict: a buyer who pays in full at closing with a normal bank loan, and the tax spread that seller financing gives. A structured installment sale gives both. The buyer closes with conventional financing and pays the full price. Before closing, the contract directs part of the price to an assignment company, which takes on the obligation to pay you on the schedule you pick (level, stepped, deferred start or a balloon). You report gain under §453 as you are paid, the same way you would on a seller note.
What drops out: buyer default, foreclosure, servicing, and an early payoff that dumps the deferred tax into one year. What stays: settled installment-sale law and a fixed schedule.
| Seller note | Structured installment sale | |
|---|---|---|
| Buyer pays at closing | The down payment only | The full price, with a bank loan if the buyer wants |
| Tax on the deferred portion | As principal is paid (§453) | As payments are received (§453) |
| What backs the payments | A lien on the property you sold, subordinate to any bank loan | The assignment company's promise, funded by an annuity it owns. You hold no lien on the annuity or the building. |
| Default and foreclosure | Your risk and your cost | No buyer after closing |
| Early payoff | Buyer can prepay, which accelerates the tax | Not possible |
| Rate | Usually higher | Usually lower |
| Flexibility | You can renegotiate or sell the note (a sale triggers the tax under §453B) | None: the schedule cannot be changed, sold or pledged |
| Servicing | You collect and track | Nothing to collect |
Seller financing still fits some deals well: a buyer you know, a large down payment, a situation where you may want to renegotiate, or a deal that cannot happen any other way. When the buyer can get a bank loan, though, the structured sale lets you keep the tax spread without becoming the lender.
What to know before you choose it. It has to be set up before closing; a note you already hold cannot be converted. The payments are locked in: you can't speed them up, borrow against them, pledge them or cash them out, and that is what keeps the deferral intact. There is no free look after closing: once the sale closes, the structure cannot be undone. The payments depend on the assignment company's ability to pay. The structure rests on settled installment-sale law, but this specific assignment structure has no published IRS ruling, so have your CPA or tax attorney review the documents. A commission is built into the pricing: Hans is paid about 2.4% of the amount structured, only if a structured sale is funded; seller financing pays him nothing (see the disclosures).
Use the seller financing calculator to compare your note with the same schedule paid by a structured sale. More on the structure in seller financing vs a structured sale, and on every note decision in our seller financing guide. For the broader tax planning behind this, see The Waterfall Strategy.
Bottom line
A bank-financed sale buys certainty: you are paid in full at closing and the risk is gone, but the whole gain is taxed that year. Seller financing buys tax spreading and a higher rate, paid for with the buyer's credit risk, early payoff risk and years of servicing. If what you really want is the tax spread, you do not have to be the lender: a structured installment sale written into the contract before closing lets the buyer use a bank loan while you are paid over time. Decide before the contract is signed, because afterward the choice is gone.
Questions to ask your CPA
- How much of my gain is recapture that is taxed in the year of sale no matter how I am paid?
- With my other income, how much gain can I recognize each year and stay in lower brackets and under the NIIT threshold?
- If I carry a note and the buyer pays it off in year two or three, what does that year's tax look like?
- Does my note rate meet the AFR for its term, and which month's rate applies?
- Is the total of my installment obligations large enough for §453A to apply?
- For a structured sale, which documents will you review before closing?
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.