The note: what the buyer pays
Level monthly payments of principal and interest.
Seller Financing Calculator: Payments, Amortization and Your Taxes
Most seller financing calculators stop at the buyer's monthly payment. This one also shows the seller's side: how much of each payment is taxable gain, how the tax spreads over the years of the note compared with a cash sale, what the interest costs you in tax, and what happens if the buyer pays off early. It works the same as an owner financing calculator. Everything runs in your browser.
Built by Hans Goldstein. Enrolled Agent, admitted to practice before the IRS. Last updated .
Your numbers
Your taxes: seller financing vs cash sale
Installment method (Section 453) against being paid in full at closing.
Same tax, no note to carry
Your note vs the same schedule paid by a structured sale
A structured installment sale uses the same installment method (Section 453). The buyer pays the full price at closing, usually with a normal bank loan, and you are paid the part you did not take in cash on a fixed schedule by an assignment company. Here it pays the same principal on the same dates as your note, so the tax on the sale is the same year by year. It has to be written into the purchase contract before closing; a note you already hold cannot be converted.
%
Illustrative. The actual payout rate is set by the insurer on the day the structure is funded and reflects the commission built into its pricing.Year by year: note vs structured
What to know before you choose it. A structured sale 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 installment method is settled 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 (disclosures).
Before you sign the contract
Get both options priced for your sale
Your note terms next to a structured sale quoted on the same schedule, with the tax on each, from a person, not a drip campaign. You can also call 213-414-2808.
- Real payout quotes on your schedule, not the illustrative rate above
- Seller financing, structured and cash compared honestly; your CPA stays in charge
- Seller financing pays the operator nothing; see the disclosures
What if the buyer pays off early?
A refinance or sale by the buyer pays the whole balance at once, and the tax on the rest of your gain comes due that year.
Year by year: payments, gain and tax
Monthly amortization schedule
How seller financing works
In a seller-financed sale (also called owner financing or a seller carry-back), you act as the lender. The buyer pays you a down payment at closing and signs a promissory note for the rest, usually secured by a deed of trust or mortgage on the property. The buyer then pays you principal and interest, often monthly, on a schedule you negotiate. Many notes amortize over 20 or 30 years to keep the payment affordable but come due as a balloon after five to ten years, when the buyer is expected to refinance.
The payment math
The monthly payment is the standard level-payment formula: the amount financed times the monthly rate, divided by one minus (1 + monthly rate) raised to the negative number of payments. A balloon does not change the payment. It only means the balance still owed at the end of the balloon year is paid in one lump sum. The amortization table above shows each month's split between interest and principal and the balance after every payment.
The seller's tax: the installment method
When at least one payment arrives after the year of sale, Section 453 generally lets you report the gain as you are paid instead of all at once. Three numbers drive it:
- Gross profit: price minus adjusted basis minus selling costs.
- Gross profit ratio: gross profit (less any Section 1245 recapture, which is taxed up front) divided by the contract price. Each dollar of principal you receive is that percentage gain; the rest is a tax-free return of basis.
- Payments in the year of sale: the down payment, including the part that pays off your own loan at closing. That is why year one usually carries the largest tax bill.
The order matters. Section 1245 recapture from cost segregation or bonus depreciation is ordinary income in the year of sale under Section 453(i), even if you receive little cash. After that, unrecaptured Section 1250 gain (building depreciation, taxed at up to 25%) comes out of the payments first, and only then the regular long-term capital gain. Interest on the note is separate: it is ordinary income in the year you receive it and is also net investment income for the 3.8% tax.
Balloons and early payoffs
A balloon or a refinance pays the rest of the principal in one year, so the rest of the gain is taxed in one year too. On a large note that can push you into higher brackets than a steady schedule would. The "What if" panel above shows the tax in the payoff year against the planned schedule, the change in total tax, and the interest you give up. Sellers who want the spread sometimes negotiate a prepayment limit or penalty.
The rate you charge
If the note's rate is below the applicable federal rate (AFR) the IRS publishes each month, Sections 1274 and 483 treat part of your principal as interest. That shifts dollars from capital gain to ordinary income. Setting the rate at or above the AFR for the month of sale avoids that.
What this calculator leaves out
It assumes real estate held more than a year, a loan paid off at closing (not assumed by the buyer), payments starting in the year of sale and the tax tables for 2026. It does not include alternative minimum tax, passive loss carryforwards, local taxes, the time value of money, buyer default, or collection and servicing costs. For a side-by-side with a cash sale and a structured installment sale, use the installment sale calculator. For more on the tax rules, read seller financing taxes and what a seller carry-back is and how it can go wrong.
How are the numbers in this seller financing calculator figured?
The rules below are the ones the calculator applies to the seller side of the sale. Tax tables are the 2026 federal tables. Checked October 18, 2026.
| Item | How it is treated | Basis |
|---|---|---|
| Gain on a note with a payment after the year of sale | Reported as principal is received, by the gross profit ratio | IRC 453 |
| Section 1245 recapture | Ordinary income in the year of sale, even if you receive little cash | IRC 453(i) |
| Unrecaptured Section 1250 gain | Taxed at up to 25%; comes out of the payments first | IRC 1(h); Treas. Reg. 1.453-12 |
| Interest on the note | Ordinary income when received; also net investment income for the 3.8% tax | IRC 1411 |
| Note rate below the AFR | Part of the principal is treated as interest | IRC 1274 and 483 |
Primary sources
- IRC section 453, installment method (Cornell LII)
- IRC section 1, including 1(h) (Cornell LII)
- IRC section 1411 (Cornell LII)
- IRC section 1274 (Cornell LII)
- IRC section 483 (Cornell LII)
- 26 CFR 1.453-12, allocation of unrecaptured section 1250 gain (Cornell LII)
- IRS Publication 537, Installment Sales
- IRS About Form 6252, Installment Sale Income
Seller financing FAQ
How does seller financing work?
The seller acts as the lender. The buyer makes a down payment at closing and signs a promissory note for the balance, usually secured by the property, then pays the seller principal and interest on an agreed schedule. Many notes amortize over 20 to 30 years with a balloon after 5 to 10 years. For tax purposes the seller can usually report the gain on the installment method, as payments are received, instead of all in the year of sale.
Is the interest from seller financing taxable?
Yes. Interest the buyer pays you is ordinary income in the year you receive it, taxed at your regular rates rather than capital gain rates, and it counts as net investment income for the 3.8% tax. Only the principal is split between taxable gain and tax-free return of basis using the gross profit ratio.
What interest rate should a seller-financed note charge?
At least the applicable federal rate (AFR) the IRS publishes each month for the note's term. If the stated rate is lower, Section 1274 (or Section 483 for smaller deals) recharacterizes part of the principal as interest, which turns capital gain into ordinary income. Some seller-financed sales qualify for a 9% cap on the test rate under Section 1274A, and land sales between family members of up to $500,000 a year have a 6% cap under Section 483(e). Above that minimum, the rate is a negotiation with your buyer.
What happens if the buyer pays off the note early?
An early payoff is a payment like any other, so all the gain not yet reported is taxed in the year you receive it, and the interest you expected stops. This is common when the buyer refinances. The calculator's "What if" panel shows the tax in the payoff year compared with the planned schedule. Some sellers negotiate a prepayment limit or penalty for this reason.
How is a balloon payment taxed?
A balloon is principal, so it is taxed the same way as any other principal payment: the gross profit ratio times the balloon is gain in the year you receive it. Because a balloon is usually the largest single payment, most of the gain can land in that one year. Spreading the gain over more years, with a longer balloon or smaller payments, keeps more of it in lower brackets.
Keep going
- Installment sale calculator: cash sale vs seller financing vs a structured installment sale.
- Seller financing taxes: the rules behind these numbers.
- Seller carry-back: what it is and what can go wrong.
- 1031 boot calculator: the taxable slice of an exchange.
- Land sale tax calculator: land and farmland, all in one year vs spread.
- Commercial property capital gains tax calculator: recapture, the 25% layer and passive losses.
- 453A interest charge calculator: notes over $5,000,000.
Installment sale + 1031 + ILIT: when is it a slam dunk?
For a large estate, a 1031 exchange, an installment sale and a trust-owned life insurance policy (an ILIT) can work together. It tends to win when most of these are true (2026 figures: the federal estate tax exemption is $15,000,000 per person, $30,000,000 for a married couple):
- Your estate is clearly over the line: a projected estate tax bill of $10,000,000 or more.
- You are married, age 50 to 60, in preferred health or better. At 75 or older, single, or in a rated health class it usually does not win.
- One separate property has stuck (suspended) passive losses at least as big as its gain.
- That property earns little: low cap rate, slow growth.
- You would sell or borrow anyway, or you do not have the cash on hand to pay the premiums.
Four or five true? Run the numbers. Enter your own estate and ages below, or open the full calculator. Estimates from published rates, not a quote or advice; your CPA and attorney decide.