Money & Finance › Commercial real estate lending › Other ways to finance a building: seller notes, leasebacks, PACE
Seller financing: the seller carries back a note
· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
The seller lends part of the purchase price to the buyer, secured by a deed of trust, instead of taking it all in cash.
See it on the Money & Finance map →How it works
Example: on a $5 million building, the buyer pays $1.5 million down and the seller carries a $3.5 million note at 6% for seven years, then a balloon. If the property is free and clear, the seller's note is a first lien; behind a new bank loan, it is a second. The seller can report gain as payments arrive (an installment sale). If the seller's own mortgage has a due-on-sale clause, it must be paid off or the lender must consent.
Why it matters
It can close deals when banks are tight, earn the seller interest and spread the tax, but the seller takes the buyer's credit risk and may have to foreclose.
Facts, rules and data
IRC Section 453 (installment sales) and Section 1274 (minimum interest), recorded deeds of trust, and the Garn–St Germain Act of 1982 on due-on-sale clauses.
Debates and risks
How common seller financing became in the 2023–26 high-rate market is hard to track, since most notes are private and only recorded liens show.
Connections (2)
▸Seller financing: the seller carries back a note can defer, via installment-sale rules, Capital gains and dividend taxesFact, law or data
The connection
Under installment-sale rules, a seller carrying a note reports gain as principal is collected, not all at once. If gain is 60% of the price, 60% of each principal payment is taxable when received. Recapture on equipment and cost-segregated parts is still taxed in the sale year, and notes over $5 million can owe extra interest on the deferred tax.
When and why
In US federal tax law, Internal Revenue Code Section 453, used by property sellers nationwide; California generally follows it for state tax.
How we know
IRC Sections 453 and 453A, IRS Publication 537, and Form 6252, which sellers file for each year they collect payments.
Debates and risks
Whether deferral pays depends on future tax rates and the buyer's credit; if the buyer defaults, repossession has its own tax rules.
▸Seller financing: the seller carries back a note lets buyer and seller negotiate the rate of Interest: the rent paid for using moneyFact, law or data
The connection
Buyer and seller negotiate rate, term and amortization without a bank's rate sheet; sellers sometimes trade a lower rate for a higher price. But the IRS sets a floor: the note must charge at least the applicable federal rate, or part of the price is treated as interest.
When and why
In private property sales nationwide; the IRS publishes applicable federal rates every month.
How we know
IRC Sections 483 and 1274, and the IRS's monthly revenue rulings listing applicable federal rates.
Debates and risks
How much a below-market seller rate really raises the price paid, which matters for appraisals and tax basis, is hard to pin down.