Seller Financing Real Estate – The New Way


Seller Financing real estate is much more than just a way to sell your investment property.  Today we are talking about how Seller Financing could lead to:

  • a full cash-out for you today of everything you invested, and then
  • another 25 years of cash flow, totaling $96,225.

Yes, both.

I’ll show you how to take a $375,000 Duplex and convert that into 6 elements:

  • $262,500 non-taxable cash (in your pocket) from a re-finance,
  • $112,500 cash (in your pocket) from the Down Payment on the Wrap-around Note,
  • a Note Receivable for another $262,500 secured by the $375,000 Duplex,
  • $1,855.30 in monthly Note payments, representing cash flow of $96,225,
  • no more management responsibility, and
  • no monthly expenses for anything – repairs, taxes, or insurance.

Let me repeat that.

You started with a Duplex worth $375,000.

You used Seller Financing.

After you do this, you have

  • $375,000 in cash,
  • a Note Receivable for $262,500 secured by a lien on the property,
  • monthly cash flow of $320.75 for 25 years, which is 300 payments, for a total of another $96,225,
  • no management responsibilities,
  • no monthly expenses, and
  • during the 25 years you still have the first lien on property that has $112,500 in Equity, an amount that is increasing every month, in case you have to take it back due to a default in your Wrap-around financing.

Seller financing your real estate might be your pot of gold.

Let’s look more closely at that.


Some people own Rental Property that is completely paid off.

No debt.

Not many people, but some do.

And the situation presents an interesting opportunity when it is time to sell the property, using Seller Financing, which we are about to explore.

This might even work for you if your property isn’t paid off, but just has a low amount of debt.

I’ve often been asked by Property Owners who are thinking of selling a rental property if they should take out a Mortgage first, and then sell the property.  Their thinking is that when the debt on the property is paid off, the Mortgage that they took out might reduce the amount of their Capital Gains.

Well, it won’t.

But hold on.

Strangely, there is actually an advantage to doing this, if you do it in a certain way.

Take notes and you’ll see how this works.

Or, if you have trouble juggling numbers in your head, just follow the reasoning and logic, and I’ll keep repeating the numbers.

First, as a refresher, let’s look at exactly what Capital Gains is.


Capital Gains is the difference between your “Adjusted Basis” in the property, and your “Sales Price,” then minus transaction costs.

That means that if you paid $300,000 for a Duplex five years ago, and you have claimed $50,000 in Depreciation, now your Adjusted Basis in the property is $250,000 (300,000 minus 50,000).  Depreciation reduces your Basis in the property.

If you now sell the property for $375,000, you will have $125,000 of Capital Gains, which is the $375,000 Sales Price (ignoring transaction costs) minus the $250,000 Adjusted Basis in the property.

The $125,000 of Capital Gains will be taxable income for you.

The Capital Gains Tax brackets are 0%, 15%, and 20%.

Since we don’t have your “Tax Profile” we don’t know which tax bracket you are in, so we will assume that you are in the 15% Capital Gains Tax bracket.

Of course, $50,000 of the $125,000 of calculated Capital Gains will be classified as “Depreciation Recapture” and will be taxed at the same tax rate as your Ordinary Income, called your Marginal Tax Rate, but will not be more than 25%.  We will assume a 25% tax rate.

But your Capital Gains amount is still $125,000 and, as you can see, the amount of debt on the property has nothing to do with it.

Now, you’ll have two taxes to pay at the end of the year.

The 25% Depreciation Recapture Tax on the $50,000 of claimed Depreciation will be $12,500.

And the 15% Capital Gains Tax on the $75,000 remaining portion of the $125,000 Capital Gains will be $11,250.

Your total taxes will be $23,750.  That’s $12,500 plus $11,250.

After you pay this amount out of your $375,000 Net Sales Proceeds, your after-tax cash amount will be $351,250.

And you no longer own the property.

Now, let’s take a look at an alternative way of selling your property.


This method involves the use of three things:

1.) debt,

2.) seller financing, and

3.) a Wrap-around Note.

The first thing that you do is re-finance the property with a 70% loan, at 5%, for 25 years, with a monthly payment of $1,534.55.  You can check out another Blog Post called “Compare 2 Loans” to help you with that.

This will provide you with $262,500 in cash, tax-free because it is a loan.

The second thing that you do is sell the property for $375,000 with a 30% down payment of $112,500, and you finance the Balance with a Wrap-around Mortgage for $262,500 at 7% for 25 years, with a monthly payment of $1,855.30.

Your Note is secured by a lien on the property until the Note is paid.

Now, to summarize, at this point, you have

  • $262,500 cash from the underlying loan proceeds,
  • $112,500 cash from the Down Payment on the Wrap-around Note,
  • a Note Receivable for $262,500 secured by a $375,000 Duplex,
  • $1,855.30 in monthly Note Payments,
  • no management responsibility,
  • no monthly expenses for anything – repairs, taxes, or insurance, and
  • monthly cash flow of $320.75 for the next 25 years.

Let me repeat that.

You started with a Duplex worth $375,000.

Now, you have $375,000 in cash, a Note Receivable for $262,500 secured by a lien on the property, monthly cash flow of $320.75 for 25 years, which is 300 payments, for a total of another $96,225, no management responsibilities, no monthly expenses, and property with $112,500 in Equity, which is increasing every month, in case you have to take it back.

This looks like a pretty good situation to be in, and “numbers-wise,” it certainly is, but there are always other considerations, and we will look at those.


Now, you should be aware that your Mortgage or Deed of Trust on the property might have a “Due on Sale” clause in it, and that Due on Sale clause would make the underlying loan due and payable when you sell the property.

Or, your Mortgage or Deed of Trust might not have such a clause.

And even if it does have such a clause, the Lender might be one of those Lenders who enforces such clauses, or the Lender might be happy to just keep the loan on the books as long as the monthly payments are coming in, since the Lender will always have a First Lien on the property securing the original debt.

And in such a situation, I have even had a Lender agree to not enforce the Due on Sale clause in return for me giving the Lender a Second Lien on another piece of property that I owned, just to add more security to the same debt.

But you should consider this fact very seriously and make your best decision.

The other contingency that you must deal with is the possibility that during the 25-year period, the Buyer might refinance at some point, or otherwise come up with the cash, and pay off the $262,500 due on the Wrap-around Note, and you’ll have to pay off the underlying loan.

No problem.

If the Buyer pays you the $262,500 you can just use it to pay off your Lender, you then deed the property to the Buyer free and clear.

No out-of-pocket, or very little.  And you might even put an Early Payment Penalty clause in your Wrap-around Mortgage, and come out with some money.

You should also make it clear to the Buyer that he is buying the property “subject to” the underlying financing, which you are paying off as he makes payments to you.

Now, let’s look at your tax liability at the end of the first year under this scenario.


The sale of the Duplex with the Wrap-around Note will trigger the Capital Gains Tax.

But you only pay the tax at the end of the year in which you receive the income, not all of it up front, like you would with a regular cash-out sale.

And with the Installment Sale, the tax will be paid over 25 years, as you receive the monthly payments which are made up of both interest and principal.

However, only a percentage of the money that you receive as a Down Payment, and only a percentage of the Principal portion of each payment will be taxable as Capital Gains, because only a percentage of these payments represents your profit.

This percentage that represents your profit is what the IRS calls your “ratio.”

Remember, your Basis in the property is $250,000 and you sold it for $375,000, so your Capital Gains is $125,000.

And $125,000 is 1/3 (one-third) of the $375,000 Sales Price.

So, your ratio is 1/3, or 33.33%.

That means that 33.33% of the “principal” portion (not the interest) of each payment that you receive, in the year in which you receive it, is considered Capital Gains, and is subject to tax.

This includes the Down Payment that you received in the first year.

Of course, the first $50,000 of the $125,000 of Capital Gains will be treated as Depreciation Recapture and we are assuming that it will be taxed at the rate of 25%, before you even start calculating your Capital Gains.

So, let’s look at the first year, and assume that the sale was on January 1.


Now, seller financing real estate will involve some amount of capital gains.

You received $112,500 as a Down Payment.

You received 12 monthly payments of $1,855.30 and the total principal portion of these was $3,670.36.

You can run an Amortization Schedule on $262,500 at 7% for 25 years and verify this.

So, your principal received in the first year is $112,500 plus $3,670.36, which is $116,170.36.

Multiply this times your ratio of 1/3 and you get $38,723.45.

This is your taxable Capital Gains in the first year.

Since this is less than the $50,000 Depreciation Recapture amount, all of it is taxed at the 25% tax rate.

Your Capital Gains tax is $9,680.86.  That’s 25% of $38,723.45.

You pay this from the $375,000 in cash that you are holding and you still have $365,319.14.

That takes care of your after-tax situation from the sale.

Now, let’s look at the cash flow from the Note Payments and the tax consequences, if any.


On your Wrap-around Note, you received 12 monthly payments of $1,855.30 for a total of $23,263.60.

On your underlying loan, you made 12 monthly payments of $1,534.55 for a total of $18,414.60.

This gives you a positive annual cash flow of $3,849.

Over the life of the loan this should provide you with a total of $96,225.

On the payments that you received, we have already accounted for the tax on the principal portion of those payments, it was taxed as Depreciation Recapture.

But each payment also contained payment of interest to you, and this is also taxable to you as “interest income.”

The total amount of interest contained in the twelve payments is $16,737.94.

And, again, I urge you to go to and create an Amortization Schedule and print it out.  You should do this every time you are considering a deal.  It is the only way you will see the real numbers.

This $16,737.94 is interest income to you, and interest income must be reported as such on your tax return, on Schedule B.

But you also made payments on the underlying loan and those payments included both principal and interest.

The total amount of interest that you paid for the twelve payments was $11,928.96.

Is it deductible, and if so, where can you deduct it?

Well, it is mortgage interest, as well as investment interest.

But it is not deductible as mortgage interest because the debt was not used to buy, build, or improve your personal residence or vacation home.

And if you did not use the money for investment purposes, it does not qualify for a deduction as investment interest.

You will continue to report both the principal portion, and the interest portion, of the monthly Note payments that you receive for the duration of the Note.


So, to recap the scenario for seller financing real estate.

In the first scenario you sell the $375,000 Duplex, and you end up with $351,250.

In the second scenario, you sell the $375,000 Duplex, and you end up with:

  • $262,500 cash from the refinancing note proceeds,
  • $112,500 cash from the seller financing note proceeds down payment,
  • a Note Receivable for $262,500 secured by a $375,000 Duplex,
  • $1,855.30 in monthly Note payments,
  • no management responsibility,
  • no monthly expenses for anything – repairs, taxes, or insurance, and
  • monthly cash flow of $320.75 for the next 25 years, a total of $96,225.

Your first year Capital Gains Tax will be $9,680 for Depreciation Recapture, and the remainder of your Capital Gains Tax liability will be paid out over the next 24 years at about $586 per year.

So, that’s our comparison.

Sometimes, your profit depends more on how you do the deal than it does on the type of property you are investing in.

By the way, I wrote a related Blog Post about the Lease Purchase For The Seller and I think you will find that interesting.


As you can see, this concept, like most of the world of Real Estate Investing, involves the use of debt.  I don’t think there is enough discussion about debt, and I think you might find some interesting information about the After-Tax Cost of Debt on another Blog Post.

I cover this same concept in more than one of my books, but the one with the most detailed information is “Do This, Not That!” and you can find it here on this website.  Use the 3D Flip Reader to look at the Contents and read the first few chapters.

The paperback is available on my Amazon Author Page, along with my other books.

And I have related Articles about tax matters from other perspectives on my LinkedIn Page.

I am also active on where I have answered over 300 questions, and they have almost 3 Million views.

If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then it is possible to use Seller Financing, and I have a lot of material for you to consider on my S1031 Exchange website.

You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography.  Here’s mine.


Title By Adverse Possession, The Myth

The Due-On-Sale Clause Is Real.

Loan Approval? Yeah, sure. Whatever.

A Living Trust Is Not A Trust.

If you are interested in exploring my Catalog of Real Estate Investing books, but don’t know where to start, I suggest these three.

seller financing

Thank you.

DISCLAIMER:  I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia.  But I am not your Attorney.  I would be honored if I were, but I am not.  Reading this Blog does not created an attorney-client relationship between us.  Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.

March 21, 2022



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