When you sell property and carry the note yourself, the IRS taxes the gain as you collect the money — not all at once. This tool computes your gross profit percentage under IRC §453, the taxable gain in the year of sale, and the payment the buyer will owe you each month.
Original cost plus improvements, minus depreciation taken.
Commissions, title, legal and transfer fees you pay.
| Scenario | Total Gain | Gross Profit % | Taxable in Sale Year | Buyer Monthly |
|---|---|---|---|---|
| $400k sale, $150k basis, $24k costs, 20% down, 15 yr @ 6% | $226,000 | 56.50% | $45,200 | $2,700 |
| $600k sale, $200k basis, $36k costs, 30% down, 10 yr @ 7% | $364,000 | 60.67% | $109,200 | $4,877 |
| $250k sale, $250k basis, $15k costs (a loss, not a gain) | -$15,000 | n/a | $0 — loss deductible in full | $4,246 |
| $900k sale, $300k basis, $54k costs, 0% down, 20 yr @ 6.5% | $546,000 | 60.67% | $0 | $6,710 |
Every figure above is produced by the calculator's own formula. Note the zero-down case: no cash is collected at closing, so no gain is recognized in the sale year — but the seller also receives nothing up front.
Normally a sale is one tax event: you sell, you realize the whole gain, you pay tax on it. Section 453 changes that when the seller finances the buyer. Instead of a single large gain, you recognize a proportional slice of gain each time you receive a principal payment.
Taxable gain for a year = principal payments received × gross profit percentage. Interest is separate: it is ordinary income reported every year, and it is not reduced by the gross profit percentage. That is why a seller-financed note produces two lines on your return — interest and gain.
The down payment, any existing mortgage the buyer takes subject to, and the principal portion of every installment are all "payments received." Depreciation recapture under §1250 does not qualify for installment treatment — it is taxed in full in the year of sale, ahead of the capital gain. Sales of inventory by a dealer are also excluded from §453 entirely.
The obvious benefit is spreading a large gain across many years, which can hold you below a bracket edge and avoid crossing thresholds such as the 3.8% net investment income tax or the Medicare IRMAA steps. The less obvious benefit is the interest itself: lending at your own note rate against property you know is often a better return than reinvesting after-tax proceeds in a bond fund.
An installment sale turns you from a seller into a lender. You no longer own the property, but you still carry the buyer's credit risk and the collateral risk of that property. If the buyer defaults in year four, you may already have paid tax on gain you collected — and now you face foreclosure costs to recover an asset whose value may have fallen. Most seller-financed notes are secured by a deed of trust naming the seller as beneficiary, and there is no due-on-sale problem because the seller is the lender.
A second trap appears if you later sell the note at a discount. Selling or factoring the note is a disposition of an installment obligation: the difference between what you receive and your basis in the note is gain or loss in that year, and the deferral you carefully built can collapse into a single tax year.
A §1031 exchange defers all gain if you reinvest in like-kind property and meet the identification rules — strictly better on deferral, but available only for business or investment real estate and only if you genuinely want another property. A cash sale pays the full tax immediately but hands you clean, unencumbered proceeds. An installment sale sits in between: partial deferral, no replacement-property requirement, and a stream of interest income.
The decision usually comes down to whether you need the cash. If you can afford to lend, the note's interest plus the deferral often beats a cash sale. If you need capital for another purchase, the exchange or a cash sale wins. Compare the note rate with what you could earn on after-tax proceeds — and note that a rate below the IRS applicable federal rate triggers imputed interest under §1274, taxing you on interest you never actually receive.
⚠️ Important: This calculator applies the general IRC §453 installment method to a seller-financed real estate sale. It does not handle depreciation recapture, debt assumed by the buyer, related-party sales, or state tax treatment, each of which changes the result. It is a planning estimate, not tax advice — confirm the figures with a CPA before you sign a note.