There are several benefits to a landowner from financing the sale of their own land. But there are also disadvantages. Here are some thoughts to consider:
1) Seller-financing is a way to defer the taxes paid on capital gains. A seller pays tax as payments are made. So, by spreading payments out over time, the taxes are spread out over time.
2) Seller-financing can lower the overall tax rate. Since capital gains rates are now progressive (depending on total income), payments can be taxed at a lower capital gains rate (assuming steady income from other sources) over many years, as opposed to a seller taking the sale proceeds all in cash and showing a huge income all in one year.
3) Seller-financing may enable the seller to obtain an above-market interest rate for the portion of the sale proceeds that are financed (4-6% in today’s market). Current interest rates available to a seller with a pile of cash who put the money in a money market, CD or T-bill are 0.1% to 2.0%.
4) Seller-financing creates a mechanism for steady, recurring cash flow over time. For folks on fixed incomes this can be attractive.
5) In a “soft” real estate market, seller-financing offers a way to attract buyers that might not be discovered otherwise. And sometimes it enables sellers to obtain a higher sale price because of the financing accommodation. The market today for rural land is “soft” – meaning, there are more sellers than there are buyers.
But, there are also disadvantages to seller-finance:
This post is part of a longer paper. Click here to see the paper.