How the seller financing calculator works
In seller financing, the seller acts as the lender. The buyer pays part of the price at closing, signs a promissory note for the rest, and pays the seller monthly, with the property securing the note through a mortgage or deed of trust. Most notes are figured on a long schedule, often 30 years, to keep the payment affordable, but come due much sooner: the balance left at that point is the balloon payment, which the buyer usually covers by refinancing with a bank or selling.
- L
- Amount financed: the sale price minus the down payment
- r
- Monthly interest rate: the note rate ÷ 12
- n
- Months in the amortization schedule
- k
- Months until the balloon is due
- M
- Monthly payment
The calculator applies each payment the way a lender does: a month's interest on the balance, rounded to the cent, with the rest reducing principal. The balloon is the balance left after the last regular payment, and it's due along with that payment.
Worked example: seller financing a $350,000 sale
A seller agrees to carry a $315,000 note at 7% after a $35,000 down payment. On a 30-year schedule the payment is $2,095.70 a month. The table shows how the balloon date changes what the buyer owes, against a 15-year note with no balloon.
| 5-year balloon | 10-year balloon | 15 years, no balloon | |
|---|---|---|---|
| Monthly payment | $2,095.70 | $2,095.70 | $2,831.31 |
| Balloon payment | $296,514.70 | $270,309.52 | None |
| Principal paid before it | $18,485.30 | $44,690.48 | $315,000.00 |
| Interest to the seller | $107,256.70 | $206,793.52 | $194,635.56 |
| Seller receives in all | $457,256.70 | $556,793.52 | $544,635.56 |
With a five-year balloon, the buyer pays down only $18,485.30 of principal and then owes $296,514.70 at once: most of the loan. That is the central risk for both sides. If rates are higher or the buyer's finances weaker in five years, a refinance may not come through, and a missed balloon can lead to foreclosure. The 15-year note avoids the balloon but costs $735.61 more a month.
Buyers planning to refinance the balloon with an investment loan can check whether the rent will support it with the DSCR loan calculator.
Seller financing rules: the IRS minimum rate, taxes and Dodd-Frank
The IRS minimum interest rate
A seller-financed note must charge at least the applicable federal rate (AFR) the IRS publishes monthly, or part of the price is treated as interest for tax purposes even if the note calls it principal. The test rate is the lowest AFR in the three months ending with the month you sign a binding contract, using the term of the note: short-term for three years or less, mid-term up to nine years, and long-term beyond that. The rates for October 2026, compounded monthly as the calculator compares them:
| Term of the note | AFR |
|---|---|
| 3 years or less (short-term) | 4.17% |
| Over 3, up to 9 years (mid-term) | 4.52% |
| Over 9 years (long-term) | 5.1% |
Taxes for the seller
Selling on a note is usually an installment sale: instead of reporting the whole gain at closing, the seller reports each year's share of the principal received, using the gross profit percentage, and pays ordinary income tax on the interest. Depreciation needs care. Any recapture income is recognized in the year of sale, however little the buyer pays that year (IRC § 453(i)): section 1245 recapture on appliances, furnishings and other personal property, including components separated out in a cost segregation study, and section 1250 recapture of depreciation taken beyond the straight-line method, such as bonus depreciation. A residential rental depreciated only with the straight-line method and held more than a year has no section 1250 recapture income, so nothing is recognized up front for the building; its unrecaptured section 1250 gain, taxed at up to 25%, stays on the installment method and is taken into account before the rest of the gain as payments come in (Treas. Reg. § 1.453-12). For a rental, the rental property capital gains tax calculator estimates the tax on the whole gain, and the guide to seller financing tax rules works through an example.
Dodd-Frank rules on homes
When the buyer will live in the home, federal lending rules can treat a seller who finances it as a loan originator. Regulation Z excludes two kinds of sellers:
- One sale in 12 months by a person, estate or trust: the note can have a balloon, but payments can't let the balance grow, and the rate must be fixed or not adjust for at least five years.
- Up to three sales in 12 months: the note must be fully amortizing, with no balloon, and the seller must decide in good faith that the buyer can repay it.
Neither exclusion covers sellers who built the home in the course of their business. Sales of investment property to an investor for business purposes generally fall outside these consumer rules, and state laws add their own requirements, so have a real estate attorney draft the note. If the seller still has a mortgage, its due-on-sale clause usually requires paying it off at the sale.
The bottom line
Seller financing lets a buyer purchase without a bank and gives the seller interest income and a spread-out tax bill, but the balloon payment is where most deals succeed or fail. In the example, a five-year balloon leaves $296,514.70 of the $315,000.00 note still owed.
Run your terms through the seller financing calculator, choose a rate at or above the AFR and a balloon date the buyer can realistically refinance by, and put the terms in a promissory note drafted by a professional.
Frequently asked questions
What is the difference between seller financing and owner financing?
None: owner financing is another name for seller financing, so this page works as an owner financing calculator too. In both, the seller lends the buyer part of the price, the buyer signs a promissory note (sometimes called a seller carryback note) and pays the seller instead of a bank, and the property secures the debt.
How is a balloon payment calculated?
The balloon payment is the balance left on the note after the last regular payment. The monthly payment is figured as if the loan ran the full amortization, often 30 years, so after a short term like five years most of the principal is still owed and comes due at once.
What interest rate should seller financing charge?
At least the applicable federal rate for the note's term, or the IRS treats part of the price as interest. For October 2026, the AFRs with monthly compounding are 4.17% for notes of three years or less, 4.52% for up to nine years and 5.1% beyond that. Most deals charge more than the minimum, often close to what a bank would.
What happens if the rate is below the AFR?
The IRS treats part of the price as interest for tax purposes, even though the note calls it principal. The seller then reports more interest, taxed as ordinary income, and less gain on the sale; the payments themselves don't change. The calculator flags a rate below the applicable federal rate for the note's term, so you can set it high enough before you sign.
Is seller financing an installment sale for tax purposes?
Usually, yes. As an installment sale, the seller reports the gain as principal payments come in rather than all at closing, and pays ordinary income tax on the interest each year. Any depreciation recapture income, such as section 1245 recapture on appliances, furnishings or cost-segregated components, is recognized in the year of sale regardless of payments. A rental building depreciated straight-line has none; the gain from its depreciation is reported with the payments, ahead of the rest of the gain.
Is a balloon payment allowed in seller financing?
Often, but not always. For a home sold to someone who will live in it, a person, estate or trust that seller-finances only one property in 12 months may include a balloon. A seller financing up to three properties in that time must use a fully amortizing note with no balloon to stay outside the loan originator rules. State laws can add limits.
What should a seller financing promissory note include?
The amount financed, the interest rate, the payment amount and schedule, the balloon date and amount, late fees, what counts as a default, and whether the buyer can prepay. A mortgage or deed of trust recorded against the property secures the promissory note, so the seller can foreclose if the buyer stops paying.
Sources and further reading
- Publication 537, Installment Sales (opens in a new tab), Internal Revenue Service
- 26 U.S. Code § 453, Installment method (subsection (i), recapture income) (opens in a new tab), Legal Information Institute, Cornell Law School
- 26 CFR § 1.453-12, Allocation of unrecaptured section 1250 gain reported on the installment method (opens in a new tab), Legal Information Institute, Cornell Law School
- Rev. Rul. 2026-19: Applicable federal rates for October 2026 (opens in a new tab), Internal Revenue Service
- Applicable federal rates (opens in a new tab), Internal Revenue Service
- 12 CFR 1026.36, Prohibited acts or practices and certain requirements for credit secured by a dwelling (opens in a new tab), Electronic Code of Federal Regulations
Related calculators
- DSCR Loan CalculatorBuyer planning to refinance the balloon? See whether the rent supports a DSCR loan.
- Rental Property Capital Gains Tax CalculatorSelling a rental on a note? Estimate the capital gains and depreciation recapture tax.
- Assumable Mortgage CalculatorIs the seller's own loan assumable? Compare taking it over with a new mortgage.