Model how a seller note changes your capital gains tax, total proceeds, and net after-tax return — and see the side-by-side comparison against an all-cash sale.
| Year | Principal | Interest | Gain Recognized | CG Tax | Interest Tax | Net Received |
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This calculator models the federal installment sale method (IRS Form 6252). It does not account for depreciation recapture, state-specific installment rules, dealer sales, or passive activity limitations. Consult your CPA and tax attorney before structuring any transaction.
Seller financing — also called a seller note or seller carry — is when the business owner accepts part of the purchase price as a promissory note from the buyer, rather than requiring all cash at closing. The buyer pays down the note (plus interest) over a defined term, typically 3–10 years.
It's common in small- and mid-market deals where buyers need to bridge a gap in SBA or conventional financing, or where sellers want to use the note to defer taxes and earn a better effective return than an all-cash sale would provide.
The IRS installment sale rules hinge on one number: the gross profit percentage (GPP). It equals your total gain divided by the sale price. If you bought a business for $300K and are selling for $2M, your GPP is 85%. That means 85 cents of every dollar of principal you receive is taxable capital gain — in the year you receive it.
In a traditional all-cash sale, you recognize the entire gain in the year of closing and pay capital gains tax on it immediately. If your gain is $1.7M and your combined rate is 23.8%, that's $404,600 due by April 15 of the following year.
With an installment sale, you recognize gain only as payments arrive. The 30% down payment triggers 30% of the gain at closing. The remaining 70% is spread over the note term. The tax you would have paid on that deferred gain stays in your pocket — earning returns — until each payment arrives.
On top of the principal, you earn interest on the outstanding note balance each year. That interest is taxed as ordinary income — not at the capital gains rate — but it represents real additional return. On a $1.4M note at 7%, that's $98,000 in year one alone. Over a 5-year term, the interest can meaningfully exceed what you'd earn parking the equivalent cash in a savings account.
High-basis sellers: If your adjusted basis is high relative to the sale price, installment deferral provides less benefit — you have less gain to spread. It works best when gain is large.
Buyers who can't get full financing: SBA 7(a) loans cap at $5M. For deals above that, or for buyers who fall short on equity, a seller note bridges the gap and keeps the deal alive.
Sellers who trust the buyer: A seller note is unsecured debt — you're a creditor, not an owner. If the buyer fails, you may not recover the balance. Only offer seller financing to buyers you've thoroughly vetted.
Default risk: If the buyer stops making payments, you face a collections process or foreclosure on business assets. Always secure the note against business assets and require a personal guarantee.
Re-characterization: If the note bears below-market interest, the IRS may impute interest under the applicable federal rate (AFR). Use at-market rates to avoid this.
Depreciation recapture: If the business has depreciable assets, recapture income (Section 1245/1250) is recognized in full in the year of sale — it cannot be deferred via the installment method. Your CPA should model this before you structure the deal.
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