Selling a Promissory Note: Discounts, Note Buyers and Taxes
Yes, you can sell a promissory note you received from seller financing, but you will almost always sell it at a discount. A note buyer pays the present value of the remaining payments at the yield it wants, which is usually well above your note's rate. For tax, selling the note is a disposition under IRC §453B: the remaining deferred gain is reported in the year you sell, measured by the price you receive minus your basis in the note.
This article covers how note buyers price your note, full versus partial sales, how to prepare, and what the sale does to your taxes.
Why sellers sell their notes
The usual reasons: a large expense or investment, a buyer whose payments have become unreliable, an estate that does not want to administer a 20-year note, or simply wanting certainty over waiting. Each is legitimate. The cost is the discount, plus losing the tax deferral that made seller financing attractive.
Before selling, compare the alternatives: a refinance of the buyer (which pays you at face value), a negotiated early payoff at a small discount, or keeping the note and managing risk.
How note buyers price a promissory note
A note buyer, sometimes called a private mortgage note buyer, is buying a stream of payments. The price is the present value of those payments at the buyer's required yield. The yield rises with risk, and these are the factors that drive it:
| Factor | Lower discount | Higher discount |
|---|---|---|
| Payment history (seasoning) | 12 or more months of on-time payments | New note or late payments |
| Payer's credit | Strong credit, stable income | Weak or unknown credit |
| Equity | Large down payment, low balance vs value | Thin equity |
| Collateral | Owner-occupied home or well-located property | Vacant land, rural or special-use property |
| Lien position | First lien | Second lien behind a bank |
| Note rate vs market | Rate near or above market | Rate well below market |
| Term remaining | Short | Long (more time for things to go wrong) |
| Documents | Recorded deed of trust or mortgage, title policy, clean payment records | Missing originals, unrecorded lien, informal records |
There is no published schedule of discounts. Get more than one quote, ask each buyer what yield it is pricing to, and read the term sheet for fees and conditions.
Simple example: pricing the discount
Simple example. Assumptions: your note has an unpaid balance of $300,000 at 6.5%, with 20 years (240 monthly payments) remaining. The monthly payment is $2,236.72. A note buyer offers a price that gives it a 10% yield.
| Item | Amount |
|---|---|
| Remaining payments | 240 x $2,236.72 |
| Unpaid principal balance | $300,000 |
| Price at a 10% yield | $231,779 |
| Discount from the balance | $68,221 (about 23%) |
The discount is not a fee. It is the difference between your 6.5% note and the buyer's 10% target, compounded over 20 years. A shorter remaining term or a higher note rate shrinks it.
Full sale vs partial sale
| Full note sale | Partial purchase | |
|---|---|---|
| What you sell | All remaining payments | A set number of payments, for example the next 60 |
| Cash now | Highest | Lower |
| Discount | Usually largest | Usually smaller, since the buyer's risk is shorter |
| After the partial term | Nothing comes back | Payments revert to you |
| Tax | Full §453B disposition | Disposition of the portion sold; allocation of basis should be worked out with your CPA |
Continuing the example: the next 60 payments total $134,203. At the same 10% yield, their present value is about $105,272. You would receive that now and resume collecting the note in year 6.
Taxes when you sell your note
The rule. Selling an installment obligation is a disposition. Gain or loss equals the amount realized minus your basis in the obligation, and it "shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received" (§453B(a)). So capital gain property gives capital gain, and ordinary recapture property gives ordinary income.
Your basis in the note is the face value minus the income you would report if it were paid in full (§453B(b)). IRS Pub. 537 puts it as: multiply the unpaid balance by your gross profit percentage and subtract that from the unpaid balance.
Continuing the example, with a 60% gross profit percentage (see gross profit percentage):
| Line | Amount |
|---|---|
| Price received | $231,779 |
| Basis in the note ($300,000 x 40%) | $120,000 |
| Gain on the sale of the note | $111,779 |
| Deferred gain you would have reported if paid in full | $180,000 |
The discount reduces your gain dollar for dollar, from $180,000 to $111,779, but you also receive $68,221 less cash. Assuming married filing jointly with $100,000 of other taxable income, 2026 federal tax on the $111,779 long-term gain is about $16,767 (computed with the §1(h)(1) ordering; state tax excluded). All of it is due for the year of the sale, so plan estimated payments.
Interest. Any accrued but unpaid interest you are paid for is ordinary interest income, not part of the note gain.
Can the sale produce a loss? Only if the price is below your basis in the note, which requires a very deep discount. The loss would take the character of the original sale.
California and other states. State tax on the note gain generally follows the state that taxed the original sale. For a California property sold on installments, California continues to tax the gain even after you move (FTB Pub. 1100).
Borrowing against the note instead
Some sellers pledge the note as collateral for a loan instead of selling it. For taxes, that often does not help: if the original sales price was over $150,000, the net loan proceeds secured by the note are treated as a payment received (§453A(d)), which triggers gain up to the loan amount. Farm property and personal-use property sold by an individual are exempt. See the §453A pledge rule.
Arrangements marketed as a way to get cash from a sale while deferring tax through a separate loan are covered in monetized installment sale. The IRS has proposed treating those as listed transactions.
Go deeper: the Section 453A pledge rule on borrowing against your note, on Big Sale Tax.
How to prepare your note for sale
- Find the signed original note and the recorded deed of trust or mortgage.
- Pull a payment history showing every payment date and amount; a servicer's ledger is best.
- Gather the closing statement, title policy and insurance declarations naming you as mortgagee or loss payee.
- Confirm property taxes are current.
- Know your numbers: unpaid balance, rate, payments left, and your basis in the note from your CPA.
- Request written quotes from several buyers, and compare net proceeds after fees and conditions.
- At closing, you endorse the note to the buyer and sign a recorded assignment of the deed of trust or mortgage. Notify the payer of the new payment address.
Estimate your note's value
The note value calculator prices the payments left on your note at a buyer's yield, shows the discount, and compares the §453B tax on selling with keeping the payments. If the payer is already behind, read what happens if the buyer defaults first, and see seller financing loan servicing if collecting is the reason you want out.
For your next sale: installment treatment without a note
A note you already hold stays a note; it cannot be turned into anything else. If you sell another property, you can get the same installment tax treatment without carrying the buyer's note: in a structured installment sale the buyer pays in full at closing, usually with a bank loan, and an assignment company pays you on a schedule you choose, so there is no note to service, discount or sell later. It has to be written into the purchase contract before closing. The trade-offs, stated once: the schedule is fixed (no speeding up, pledging or selling), the payments depend on the assignment company's ability to pay, there is no free look after closing, this specific structure has no published IRS ruling so your CPA should review it, and a commission is built into the pricing (Hans is paid about 2.4% of the amount structured only if one is funded; seller financing pays him nothing, see the disclosures). Compare both on the seller financing calculator, and see the full seller financing guide.
Bottom line
Selling a promissory note turns a stream of payments into cash now, at a discount set by the buyer's required yield and the note's risk. For taxes, it is a §453B disposition: you report the price minus your basis in the note, in the year of sale, with the same character as the original gain. Compare a full sale, a partial sale and a buyer refinance before deciding, and have your CPA run the tax on each. If you are still negotiating the original sale, the calculator shows what a note is worth to you if you hold it.
Questions to ask your CPA
- What is my basis in the note, and what gain would a sale at this price produce?
- Is any part of the gain ordinary income because of the original sale's character?
- How would a partial sale be reported, and how is basis allocated to the payments sold?
- What estimated tax payment do I need for the year of the sale, federal and state?
- Would borrowing against the note trigger the §453A pledge rule in my case?
- Would an early payoff or refinance by the buyer leave me better off after tax than a note sale? (See early payoff, default and disposition rules.)
Primary sources
- IRC section 453B (Cornell LII)
- IRC section 453 (Cornell LII)
- IRS Publication 537, Installment Sales
- IRS About Form 6252, Installment Sale Income
Authority pages checked October 18, 2026.
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 an Enrolled Agent, admitted to practice before the Internal Revenue Service, and a licensed insurance agent (CA Insurance License #4273294). He 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.