Should A Landowner Offer “Seller-Financing”?

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:

Pros

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:

Cons

This post is part of a longer paper.  Click here to see the paper.