Seller Financing vs Structured Sale vs Cash: Side by Side
Seller financing, a structured installment sale and a cash sale differ mainly in who owes you after closing and which risks you keep. Seller financing and a structured sale both use the installment method (§453), so the tax spreads the same way if payments run on the same schedule; cash taxes all the gain in the year of sale. Seller financing keeps settled law and a lien on the property but leaves you exposed to the buyer; a structured sale removes the buyer but makes you an unsecured creditor of an assignment company, with an open legal question and a commission built into the rate.
The three choices in one table
| Cash sale | Seller financing (carry-back) | Structured installment sale | |
|---|---|---|---|
| Who owes you after closing | Nobody | The buyer | An assignment company, usually funded by a fixed annuity it owns from a highly rated life insurer (some programs use a funding agreement) |
| Security | Not needed | Deed of trust or mortgage on the property | None: you are an unsecured creditor |
| Tax timing | All gain in the year of sale | Gain as principal is paid (§453) | Gain as principal is paid (§453), if the structure holds |
| Legal footing | Settled | Settled | No IRS ruling specifically approves the assignment structure |
| Credit risk | None | Buyer default, bankruptcy, repossession | Assignment company and the insurer or other funding behind it |
| Early payoff | n/a | Buyer can refinance, sell or prepay, which accelerates the tax | Not possible |
| Flexibility | Full | You can renegotiate, sell or pledge the note (selling or pledging triggers the tax) | None: no acceleration, pledge or sale |
| Rate | Whatever you invest in | Usually higher | Usually lower |
| Cost | Nothing extra | Your attorney and servicing time | Commission built into the rate, sometimes provider fees |
| Servicing | None | You collect, track taxes and insurance, chase late payments | None |
Credit risk: a buyer vs an assignment company
With seller financing, the risk is your buyer. If the buyer stops paying, you foreclose. In California a trustee's sale cannot be scheduled until at least three months after the notice of default is recorded (Civ. Code §2924), a bankruptcy filing freezes the foreclosure (11 U.S.C. §362), and a seller who carried back the purchase price generally cannot get a deficiency judgment (Code Civ. Proc. §580b). Taking the property back has its own tax rules (§1038). If a bank lends first and you carry the rest, your lien sits second.
For context, commercial real estate loans made by professional lenders were more than 11% delinquent at U.S. banks through 1991, and banks wrote off roughly 8% of their commercial real estate loans over 2008 to 2017 (Federal Reserve charge-off and delinquency rates, all banks). A note to one buyer is less diversified than any bank's portfolio.
With a structured sale, the risk is two financial companies. The buyer is released at closing. You hold an unsecured claim on the assignment company, which owns whatever funds your payments. You hold no lien on the annuity, and you should not: a note secured by cash or a cash equivalent is treated as a payment at closing (Temp. Reg. §15a.453-1(b)(3)(i)). Life insurers have failed. In past failures, payments were frozen, sometimes for years, and some structured settlement payees took lasting cuts; after Executive Life of New York was liquidated, some payees were reduced to about 40% of their original payments (Langkamp v. United States, 943 F.3d 1346 (Fed. Cir. 2019)). Do not count on a state guaranty association: in California its payee rule is written for injury settlement annuities, not sale annuities (Cal. Ins. Code §1067.04(v)).
The honest summary: seller financing carries a common risk you can see; a structured sale carries a rarer risk you cannot control. Neither is zero.
Control: renegotiate vs locked
A seller note is yours. You can agree to a new rate, extend the term, accept a discounted payoff or sell the note. Each of those has tax effects: selling or giving away the note is a disposition that triggers the deferred gain (§453B), and pledging it for a loan is treated as a payment on sales over $150,000 (§453A(d)).
A structured sale is locked by design. No acceleration, no pledge, no sale, no renegotiation. That lock is part of what supports the deferral, and it is also the cost: structure only money you will not need.
The flip side of control is exposure. A buyer can pay off a seller note whenever the note allows, usually when refinancing or reselling, and your due-on-sale clause often forces the payoff anyway. When that happens, all the remaining gain is taxed in that year.
Cost and yield
Simple example. You sell for $1,000,000 with a $400,000 basis, so each principal dollar carries 60% gain. You take $200,000 down and finance $800,000 over ten years, level principal of $80,000 a year, interest on the declining balance. Assume a 7% seller-note rate and a 4.5% structured rate (both hypothetical, for illustration only; real rates depend on the market and the deal).
| Cash sale | Seller note at 7% | Structured at 4.5% | |
|---|---|---|---|
| Gain taxed in year of sale | $600,000 | $120,000 | $120,000 |
| Gain taxed each later year | $0 | $48,000 | $48,000 |
| Total interest over 10 years (before tax) | n/a | $308,000 | $198,000 |
| Commission | None | None | Built into the 4.5% rate |
Interest here is computed on balances of $800,000, $720,000 and so on down to $80,000, which sum to $4,400,000 of balance-years: 7% of that is $308,000 and 4.5% is $198,000. The gain schedule is identical; the difference is the rate and who you depend on. Interest is ordinary income either way, taxed each year, and passive losses cannot offset it.
Now the risk that the rate does not show:
Simple example, continued. The buyer refinances after two principal payments and pays off the remaining $640,000 of the seller note. At 60% gain per dollar, $384,000 of gain lands in that one year, instead of $48,000 a year for eight more years.
The structured schedule cannot be paid off early, so that scenario does not arise. The structured sale's own worst case is different: if the IRS successfully argued that you were paid at closing, all the deferred gain would be taxed in the year of sale while the money stayed locked. See structured installment sale for both sides of that question.
What the structured rate includes. In an annuity-funded structure, the producer's one-time commission is priced into the annuity. Hans discloses his: about 4% of the amount structured in total, his share currently about 2.4%, no trail. He earns nothing on seller financing or a cash sale. Ask any provider, in writing, for the commission in dollars, the rate with no commission, and any fee or spread the assignment company keeps.
When each one fits
Land to a neighbor. A farmer next door who has farmed alongside you for decades, a big down payment, first position on the note, and a buyer who is unlikely to resell. Seller financing often fits: you know the buyer, you get the higher rate, and a payoff would not wreck your plan. Farm property is also exempt from the §453A interest charge and pledge rule (§453A(b)(3)(B)).
A rental to a stranger. A buyer you do not know, financing with a bank loan anyway, and a plan that depends on gain arriving on schedule for years, perhaps to meet stuck passive losses. A structured sale can fit that schedule: the buyer's bank loan pays in full at closing, and the payments cannot be prepaid. It also brings the open legal question and an unsecured claim, so have your own counsel review it.
A business to a manager. A key employee who cannot get full bank financing. Seller financing is often the only way the deal happens, and you may want the ability to renegotiate if the business has a bad year. See seller financing a business sale.
Neither fits if you will need the money soon, if you are older and holding until death for the step-up would win, or if you have no bracket to spread and no losses to meet. Then cash, a full 1031 exchange or simply holding may be better.
Can you combine them? Yes. A contract can pair cash at closing, a seller note and a structured portion. Each piece keeps its own risks, and the structured piece must be written into the contract before closing.
Structured sale vs 1031. A full exchange defers all the gain and keeps you in real estate; a structured sale spreads the gain and takes you out. They can also work together: a structured note can carry the boot you cannot avoid in an exchange. See 1031 boot.
Run all three in the calculator
The calculator runs a cash sale, seller financing and a structured sale side by side on your price, basis, depreciation, loan payoff and state, and shows the year-by-year tax. For a note you carry yourself, the seller financing calculator adds payment and amortization detail. Then compare the full tax picture with installment sale vs lump sum and the rules for carrying your own note in seller financing taxes.
Bottom line
All three are legitimate ways to sell. Cash is simple and liquid but taxes everything at once. Seller financing spreads the tax on settled law and pays a higher rate, but your buyer can default or pay you off early. A structured sale fixes the schedule and removes the buyer, but you become an unsecured creditor, give up all flexibility, pay a commission built into the rate, and rely on a structure no IRS ruling specifically approves. Pick the risk you would rather hold, with your CPA and attorney, before the contract is signed.
Questions to ask your CPA
- If the buyer paid off a seller note in year two or three, what would that year's tax look like?
- How much gain lands in the year of sale regardless of structure (recapture, loan payoff, down payment)?
- Does the note carry adequate stated interest for its term (§§483, 1274)?
- Is my sale large enough for §453A to apply?
- For a structured sale, which documents will you review, and do they give me any security that could make the obligation a payment?
- What does each option do to my state tax and my Medicare premiums over the payment years?
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 a licensed insurance agent (CA Insurance License #4273294) and 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.