Posted by Michael Morrongiello on June 24, 2000 at 23:18:14:
When you sold your property and took back a note, this is called “an installment sale” and the tax treatment for such a sale is calculated in a manner where you are taxed on your profit (your net profit over your basis in the property) when the interest and principal is paid out to you over time. The tax advantage here is that you are not taxed on your profit all at once in the year you received it.
IF you sell off a portion of this seller financed note, sometimes called a PARTIAL sale, then you would be taxed on the income you received from the sale of the note in the year that you received that cash as ordinary income, however the “residual” or remainderman interest that you would still have in the note would be taxable once again under the installment sale method once the note were to revert back to you in the future. So you do preserve some of the installment sale tax benefits.
As is always the case with tax questions, it is best to consult with a COMPETENT tax practioner who understands real estate and the taxation methods used with installment sales.
If you do decide to go the route of a sale of some of your note, feel free to consult with me for further input.
To your success,