Installment Sale Calculator

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.

Your numbers

The note
$
$
The amount you finance is the price minus the down payment.
%
Should be at least the applicable federal rate (AFR) for the month of sale.
Sets the monthly payment.
Leave blank or 0 for a fully amortizing note.
Your basis and costs
$
Cost plus improvements, minus all depreciation taken.
$
Taxed at up to 25%, out of the first payments.
$
Ordinary income in year one, however you are paid.
%
$
Paid out of the down payment.
Your taxes
$
Wages, pensions, rents and so on.

The note: what the buyer pays

Level monthly payments of principal and interest.

Your taxes: seller financing vs cash sale

Installment method (Section 453) against being paid in full at closing.

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:

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.

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.

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