Sell My Houses Tips

What Is Seller Financing?

Seller financing is a transaction where the seller agrees to receive regular payments, typically monthly from the buyer instead of a lump sum payment until the agreed upon amount is paid. As in any normal sale, a down payment is negotiated between the parties. It is a simply a case of seller agreeing to lend money to the buyer to purchase and close on the property. The seller transfers the ownership of the property to the buyer at the closing. In return the seller receives a mortgage, entitling him to a schedule of payments and a lien on the property until the loan is repaid. It is also called owner financing, or owner carry-back.

Seller financing differs from conventional loans. The seller does not give the buyer cash to purchase the home as a lender does. The seller instead extends credit to the buyer against the purchase price of the home and the buyer executed a promissory note and trust deed (or mortgage) in favor of the seller. The buyer will generally be required to give the seller a down payment, make monthly installments on the loan and have to pay interest.

From a seller’s point of view, seller financing will increase the pool of potential buyers. There are many buyers who look only for properties offering seller financing. The deal can be closed quickly as the formalities to be completed are few. If one or more payments are received on the sale of a property after the tax year in which the sale occurred, the IRS will treat such a sale as an installment sale and will tax only the percentage gain reflected by the payments received in that year and not the entire gain. Seller financing spreads the gain over time and helps reduce taxes as taxes are paid as payments are received. Spreading a large gain over time can prevent being bumped into a higher tax bracket.