Seller Financing Calculator: Your Payment, Interest and Tax Each Year

How to read the seller financing calculator

The calculator above runs the same tax engine for every year of the note. Enter the price, down payment, rate, amortization, balloon year, adjusted basis, depreciation taken, selling costs, filing status, state and your other income. Each row of the results is one tax year.

• Payment. The level monthly payment the buyer makes, totaled for the year. In the balloon year it also includes the lump sum.
• Interest. The part of each payment that is interest on the unpaid balance. Early years are mostly interest.
• Principal. The part that pays down the note. Year one also counts the down payment.
• Gain recognized. Principal received that year times your gross profit ratio, plus any depreciation recapture, which all lands in year one.
• Tax. Federal income tax, the 3.8% net investment income tax when you are over the threshold, and state tax, on the gain and the interest for that year.

The engine stacks each year on top of the other income you enter, so a year with a big balloon is taxed at higher brackets than a quiet year. That is the whole point of spreading the gain: keep more of it in lower brackets. For the rules behind each line, see our guide to seller financing taxes and the broader installment sale tax page.

The gross profit ratio: the number that drives every year

Under Section 453, each dollar of principal you collect is part return of your basis and part gain. The split is fixed at closing by the gross profit ratio (Form 6252 calls it the gross profit percentage):

• Gross profit = selling price minus adjusted basis, selling costs and any recapture already taxed.
• Contract price = selling price minus any existing mortgage the buyer takes over (up to your basis).
• Gross profit ratio = gross profit divided by contract price.

If the ratio is 60%, then 60 cents of every principal dollar is taxable gain and 40 cents is tax-deferred return of basis. Interest is not part of this math; it is taxed separately as ordinary income. For a building, Treas. Reg. 1.453-12 says the gain that comes out first is unrecaptured Section 1250 gain (taxed at up to 25%), and only after that layer is used up does the gain get the regular capital gain rates. See depreciation recapture on an installment sale for how that layer works.

Interest is ordinary income, and the AFR sets the minimum rate

The interest the buyer pays is ordinary income to you every year, taxed at your regular bracket, and it counts as investment income for the 3.8% net investment income tax. It does not get capital gain rates. Your state generally taxes it too.

The note rate also has a floor. If the stated rate is below the test rate, Sections 483 and 1274 treat part of your principal as interest. That lowers your price and gain but raises your ordinary income. For a sale, the test rate is the lowest applicable federal rate (AFR) in effect during the 3 calendar months ending with the first month you have a binding written contract, under IRC 1274(d)(2). The AFR class depends on the note's weighted average maturity: short-term (3 years or less), mid-term (over 3 to 9 years) or long-term (over 9 years). For October 2026, Rev. Rul. 2026-19 sets the AFR, monthly compounding, at 4.17% short-term, 4.52% mid-term and 5.10% long-term. The calculator checks your rate against the right class and window. The details are on the installment sale interest and AFR page.

Down payment and the year-one tax

The down payment is taxed in the year of sale at the same gross profit ratio as every other principal dollar. On top of that, year one can carry two items the buyer did not pay you for yet:

• Depreciation recapture under Sections 1245 and 1250 (equipment, cost segregation and bonus depreciation) is taxed in full in year one under IRC 453(i), whatever the buyer pays.
• Unrecaptured Section 1250 gain comes out of the first principal dollars, so the down payment often carries the 25% layer.

Selling costs, and any loan you pay off at closing, come out of the down payment too. Size the down payment so the cash you keep at closing covers the year-one tax. The calculator flags it when the down payment does not cover the loan payoff and selling costs.

Balloon payments: why the last year can be the biggest tax year

Most seller notes amortize over 20 to 30 years but come due in 5 to 10 with a balloon. Amortization is the schedule that sets the monthly payment; the term is when the remaining balance is due. When the buyer refinances and pays the balloon, all the principal left on the note is collected at once, and all the gain left in it is recognized that year. Set the balloon year with your tax picture in mind: a year with low other income, after retirement, or after a move to a lower-tax state can soften it. An early payoff has the same effect. The calculator has a payoff option so you can see the tax in the year the buyer pays you off.

Worked example: a $1.2 million rental building

Assumptions (labeled, for illustration only): price $1,200,000; adjusted basis $400,000, including $150,000 of straight-line building depreciation; selling costs 6% ($72,000); no loan to pay off; down payment $240,000 (20%); note $960,000 at 6.5% interest, 30-year amortization, balloon at the end of year 7; married filing jointly; $120,000 of other ordinary income; Texas (no state income tax); sale in 2026. Numbers come from the site's tax engine.

• Gain $728,000; gross profit ratio 60.67%.
• Monthly payment $6,067.85; balloon in year 7 $867,996.
• The note's weighted average maturity is about 6.6 years, so the mid-term AFR applies. The lowest mid-term AFR in the August to October 2026 window is 4.26% (monthly compounding), so 6.5% clears the floor.

Total tax over 7 years: $228,426, of which $128,098 is tax on the gain and $100,329 is tax on $417,696 of interest. A cash sale at the same price would owe $151,757 in year one. Year one's $150,000 of unrecaptured Section 1250 gain comes out of the down payment, which is why year one is heavier than years 2 to 6. Net cash at closing is $168,000 ($240,000 minus $72,000 of costs), which covers the $50,644 year-one tax.

The same deal in California raises total tax over the 7 years to $330,712 and year one to $69,955. Most of the remaining gain lands in year 7 because of the balloon; a longer term or a planned low-income year would spread it more. Run your numbers in the calculator above to see your own schedule.

Protect the note before you rely on the numbers

Every number in the table assumes the buyer pays. Sellers protect that with a meaningful down payment, a first-position deed of trust or mortgage (or a UCC lien on business assets), a personal guarantee from the buyer's owners, a rate at or above the AFR, acceleration and due-on-sale clauses, clear default and cure terms, and annual financial reporting from the buyer. If you do take real property back, Section 1038 limits the gain you recognize on the repossession.

How this compares with the other paths

A cash sale pays all the tax in one year. Seller financing spreads it, earns interest, and keeps the buyer's credit on your balance sheet. A 1031 exchange can defer all of it if you buy replacement property, and you can pair a 1031 with an installment note on the boot. Get the full Big Sale Tax Analysis to see this note modeled side by side with a cash sale, a 1031, an Opportunity Zone fund, a deferred sales trust, a Delaware statutory trust and a charitable remainder trust.

Get the full Big Sale Tax Analysis

Frequently asked questions