You are selling, the buyer wants you to carry part of the price, and you are not sure you want to be the bank. Here is what carrying the note involves, what can go wrong, the tax rules with dated figures, and a way to keep the payments without being the lender.
By Hans Goldstein, EA · Updated October 15, 2026
Carrying the note (also called a seller carry back) means you sell the property but lend the buyer part of the price, so you become the bank and collect payments over years. It can raise your price and spread the tax under IRC §453, but you take on the buyer’s default risk, a foreclosure you may have to run yourself, and the servicing. If your real goal is a payment stream and a lower tax bill, there is a way to get both without being the lender: an installment sale where the buyer pays the full price at closing and a separate company owes you the payments. On the example below that is the difference between $308,899 of tax in one year and $82,660 spread over ten.
Tell me the sale price and what the buyer is asking you to carry. I will tell you plainly whether carrying it makes sense, and whether a structure where the buyer pays in full nets you more after tax.
When a buyer cannot or will not borrow the whole price from a bank, the seller can accept a promissory note for part of it. The note is secured by a deed of trust or mortgage on the property you just sold. That is why it is called seller carry back, carryback financing, a carry back loan, a purchase-money note, owner financing or seller financing. They are the same thing. You deliver the deed, the buyer owes you the unpaid price with interest, and you are the lender until it is paid.
This page describes seller financing so you can decide whether you want to be in it. It is not the same as a structured installment sale, in which the buyer pays you in full at closing. The difference is the whole question, and it is covered in the alternative section below.
Most guides list “default risk” and stop. Here is what each risk means in practice.
| Risk | What actually happens | What reduces it |
|---|---|---|
| The buyer stops paying | Your income stops. On the example below the payment is $182,601 a year, about $15,217 a month, so every month of missed payments is a month you do not get that money, plus legal fees to chase it. | Larger down payment, credit check, income verification, a servicer who reports late payments fast. |
| Foreclosure is on you | You hire the trustee or attorney and advance the costs. In California the statutory notice periods alone run more than three months after a notice of default (Civil Code §2924). Judicial foreclosure in many states takes a year or longer. You may get the property back in poor condition. | A lawyer-drafted deed of trust, title insurance on the lien, property inspection before you sell. |
| You are behind a bank | If you carry a second note and the first lender forecloses, you are paid only after the bank, and only if the sale brings enough. Many second-position sellers end up paying off or catching up the first loan to protect their position. | Ask for a request-for-notice of default on the first loan, and keep the first loan small relative to value. |
| Property taxes and insurance lapse | A property tax lien jumps ahead of your note, and a house that burns without insurance leaves you with a lien on a lot. You are not told unless you ask. | Impound (escrow) taxes and insurance through a servicer, name yourself loss payee, require proof every year. |
| You cannot get a deficiency | In California a purchase-money loan on a home cannot be pursued for a shortfall after foreclosure (Code of Civil Procedure §580b), so the house is all you get. Other states differ. | Count the house as your only collateral, and size the note to the value you could actually sell for. |
| Due-on-sale clause | If you still have your own mortgage and wrap it, your lender can call the whole balance when title transfers. Federal law limits when it can (12 U.S.C. §1701j-3), but a wrap on an ordinary loan is a legal risk. Also the buyer’s own lender, if any, will have a clause. | Pay off your loan at closing, or get written lender consent. |
| Servicing is a job | Someone must collect, track the balance, send year-end statements, chase late payments, issue the payoff at the end. Doing it yourself is possible but you become the one calling the buyer. | Hire a loan servicer; get the fee quoted in writing before closing. |
| Your money is locked in | You cannot spend principal that is out on a note. You can sell the note, usually at a discount to its balance, and the discount is not a number to count on. | Never carry money you may need within the term. |
| The note dies with you, not the tax | Heirs inherit the note, and the unpaid gain in it is income to them with no basis step-up (IRC §691). | An estate plan that names who holds the note. |
| Rules for sellers who lend | Federal loan originator rules apply to people who regularly lend. Small-volume sellers fit exclusions with conditions on the loan terms (next section). | Have the loan terms checked against the exclusion before you sign. |
If the property is a one-to-four unit home the buyer will live in, federal loan originator and ability-to-repay rules can apply to you as the lender, because the Dodd-Frank Act and the SAFE Act reach people who make residential loans. Regulation Z has two exclusions for sellers who finance only a few sales (12 CFR §1026.36(a)(4) and (a)(5)):
| Three-property exclusion | One-property exclusion | |
|---|---|---|
| How many sales you finance | Three or fewer properties in any 12-month period | Only one property in any 12-month period |
| Who qualifies | Any person, if the terms below are met | A natural person, estate or trust |
| Loan terms required | Fully amortizing, you determine in good faith the buyer can repay, fixed rate or adjustable only after five or more years with reasonable limits | No negative amortization, fixed rate or adjustable only after five or more years with reasonable limits |
| You built the home? | Not if you built it or acted as the builder | Not if you built it or acted as the builder |
The practical point: a balloon note and an interest-only note may or may not fit, depending on which exclusion you use and on the loan terms. Have a real estate attorney confirm before you sign. Commercial and investment property sales are mostly outside these rules, but state law still applies. Facts checked October 15, 2026; this is education, not legal advice.
A seller who accepts payments over more than one year reports the gain as the principal is received, using the gross profit percentage (gain divided by contract price). Each payment splits into three pieces: return of your basis (untaxed), gain (long-term capital gain rates if you held over a year), and interest (ordinary income). You report it on Form 6252 each year. Details are in IRS Publication 537 and in our guide to the traditional installment sale. Three things trip people up:
A carried note must charge adequate stated interest. If the rate is below the IRS applicable federal rate (AFR), part of the price is treated as interest instead of principal (IRC §1274 and IRC §483). That moves some of your gain into ordinary income. The October 2026 rates, annual compounding, from Rev. Rul. 2026-19, Table 1:
| Note term | Minimum rate (AFR) | Checked |
|---|---|---|
| 3 years or less (short-term) | 4.25% | October 15, 2026 |
| Over 3 up to 9 years (mid-term) | 4.61% | October 15, 2026 |
| Over 9 years (long-term) | 5.22% | October 15, 2026 |
Example, computed with the Goldstein & Co. engine on October 15, 2026: a $1,200,000 ten-year note that pays 3.0% a year, against the 5.22% long-term rate, has about $125,053 of the stated principal recharacterized as interest. The AFR resets every month, so check the month of your contract. The rate is a floor. Buyers that cannot borrow from a bank usually have to pay more than the AFR to get you to lend.
If the total face amount of your installment notes outstanding at year end is above $5,000,000, you owe an interest charge on the tax you are deferring on the amount over $5,000,000 (IRC §453A). It is a charge, not a tax on the gain. Farm property and personal-use property such as a home are exempt. Example, same engine run: an $8,000,000 non-farm sale, $6,000,000 of unrecognized long-term gain, all in a note. The charge is $31,500 for the first year at the 7% underpayment rate for the fourth quarter of 2026 (IRS quarterly rates). See the section 453A explainer.
If you are selling your main home, IRC §121 excludes the first $250,000 of gain ($500,000 married filing jointly) if you owned and lived in it two of the last five years. Only the gain above the exclusion is spread under the installment method. A home is personal-use property, so the $5 million interest charge does not apply to it.
These are four ways to get paid for the same property. Taxes use the same section of the code in rows two and three, so the difference between them is not the tax. It is who owes you the money.
| All cash at closing | You carry the note | Installment sale, buyer pays in full at closing | Carry a smaller note and structure the rest | |
|---|---|---|---|---|
| Who owes you | No one | The buyer | A separate company, funded at closing by an annuity from a life insurer | The buyer for the small note, the company for the rest |
| If the buyer stops paying | Not your problem | Your problem: collect, foreclose, resell | Not your problem: the buyer already paid | Only the small note is exposed |
| Collateral | None needed | The property you sold | The insurer’s obligation, not the property | Property for the small note |
| Tax on the gain | All in the year of sale | Spread over the payments (§453) | Spread over the payments (§453) | Spread |
| Payments | None | Set by the note; buyer chooses to prepay | Fixed schedule you choose; cannot be sped up | Both |
| Rate | Whatever you earn on the cash | Negotiated, above the AFR; this is the reward for the risk | Set by the insurer’s annuity pricing; lower than a risky note | Mixed |
| Servicing | None | You or a servicer | The payor sends it | Mixed |
| Cost to set up | None | Attorney, title, servicer | The insurer pays a one-time commission to the brokerage firm, built into the annuity pricing | Both |
| Fits when | You want to be done and the tax is small | Buyer has strong credit and a big down payment; you can bear the risk | You want income and a lower tax bill, and the buyer can pay in full | The buyer is short of the price by a small amount |
See also structured installment sale plus a seller carryback for closing a price gap, why not just take payments from the buyer, and what happens if the buyer defaults.
A married couple in California sells a rental property for $1,500,000. Their adjusted basis is $400,000 and selling costs are $90,000, so the gain is $1,010,000. Other income is $120,000 a year. The engine compares an all-cash sale with the same sale paid over 10 years. The tax is the same whether the payments come from a note you carry or from a payor the buyer funds at closing, because both are §453 installment sales. Here is the difference:
| Cash sale, all in 2026 | Paid over 10 years (carried note or structured payout) | |
|---|---|---|
| Gain | $1,010,000 | $1,010,000 |
| Tax on the gain | $308,899 (30.6% of the gain, federal, 3.8% surtax and California) | $82,660 over 10 years |
| Tax on the interest the payments carry | Not applicable | $138,707 over 10 years |
| Yearly payment | Whatever you withdraw | $182,601 a year |
| After-tax money at year 10, if untouched | $1,582,011 | $1,693,628 ($111,617 more) |
| If the buyer stops paying in year 3 | Nothing to chase | Carried note: $182,601 a year stops and you foreclose. Structured payout: nothing changes, the buyer already paid. |
Reading it honestly: the tax gain from spreading is the same in both right-hand cases. What carrying the note adds is risk, and it can add a higher interest rate, because a note from a buyer who could not get a bank loan should pay more than an insurer’s annuity. That is a real trade: higher rate on a risky note versus a lower rate on a payment that does not depend on the buyer. If you would take the lower rate for certainty, the buyer does not need to carry anything.
Because less tax is paid in year one, a seller can accept a lower price and still end up even. In this example a structured payout sale at about $1,321,651 nets the same present value after tax as the $1,500,000 cash sale, a gap of $178,349 the buyer could keep. That is the engine’s break-even, not a promise. Try your own numbers on the sell for less, net more calculator. If you are a buyer’s agent trying to bridge a gap, use the buyer offer gap calculator.
Run on October 15, 2026 with the Goldstein & Co. engine: 2026 federal brackets, the 3.8% net investment income tax and AMT (IRS Rev. Proc. 2025-32), and 2026 state brackets. The 5.0% payout rate is an assumption, not a quote. After-tax money at the end assumes nothing is spent and both paths earn 5.0%, taxed every year. Rental property, California, married filing jointly, 10-year payout. These are estimates, not a quote.
A structured installment sale keeps the installment tax treatment and removes the lender role. The buyer pays the full price at closing, as in an all-cash sale. The buyer’s cash for the portion you want paid over time goes to a separate, independent assignment company that agrees to pay you on a schedule you choose. The company funds those payments with a fixed annuity from a highly rated life insurer. You do not hold the buyer’s note, you do not foreclose, and the buyer’s credit does not matter after closing. See how a structured installment sale works and how it differs from carrying the note.
Why a buyer may like it too: they get a clean closing with their own financing or cash, and they may be able to pay a slightly lower price if the seller nets more after tax.
The calculators: sell for less, net more, buyer offer gap, recapture at closing when you carry a note and the structured sale calculator.
If you are doing a 1031 exchange, a carried note is “boot” unless it is handled inside the exchange. Read using a 1031 exchange and an installment sale together before you agree to carry anything.
Related: forced-to-sell step-by-step guides, land contract tax treatment, every option compared side by side and section 453 vs a deferred sales trust.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Seller carry back is when you sell a property and lend the buyer part of the price. The buyer signs a promissory note, you record a deed of trust or mortgage on the property, and the buyer pays you over time with interest. You are the lender until the note is paid.
It means you accept a promissory note from the buyer for part of the price instead of getting all cash. You “carry” the unpaid balance. If the buyer stops paying, the property is your collateral and you must go through foreclosure to recover it.
Only if the buyer has a large down payment, verified income and credit, and you can bear a default without hardship. If you mainly want payments and a lower tax bill, ask about an installment sale where the buyer pays in full at closing and a separate company owes you the payments, so you are not the lender.
Carry back financing is another name for seller financing: the seller extends credit to the buyer secured by the property. It is also called a purchase-money note, owner financing or a carryback loan. Most carried notes are secured by a deed of trust (or mortgage, depending on state).
It means the seller is the lender on the part of the price the buyer does not pay at closing. “Carry back” and “carry the note” describe the same thing. The seller holds a note and a lien on the property.
It is the note the seller holds after selling. The buyer owes principal and interest on a schedule. A carry back loan can be in first position if there is no bank loan, or in second position behind a bank loan.
The buyer can stop paying, you may have to foreclose and advance the costs, a first lender or tax lien can come ahead of you, taxes and insurance can lapse, a due-on-sale clause can cause trouble if you have your own loan, and your principal is tied up until the note is paid. The table above covers each one.
It can be if the buyer is strong, the down payment is large, and the interest rate pays you for the risk. It is a poor idea if the buyer was turned down by a bank and puts little down. Compare it to a structure in which the buyer pays in full and you keep the payment stream.
There is no set rate. The legal floor is the applicable federal rate, which for October 2026 is 4.25% short-term, 4.61% mid-term and 5.22% long-term (Rev. Rul. 2026-19). Because a carried note is riskier than a bank loan, sellers commonly ask for more. Check the AFR for the month of your contract.
No law sets one. Many advisors look for 20% or more because a buyer with real money in the property is less likely to walk away, and it covers your costs if you must foreclose. The less the buyer puts down, the more your note behaves like an unsecured bet on the buyer.
The bank lends most of the price and takes first position. You carry a smaller note behind it in second position. You are paid second, so if the bank forecloses you can lose everything unless the sale price covers both loans. Many banks restrict how large a second note can be.
Yes. A second-position carryback is common when a buyer has a bank loan but not enough down payment. Ask the first lender if it allows secondary financing, and ask for notice of any default on the first loan so you can protect your position.
You send notices, then start foreclosure under your deed of trust or mortgage. In California the statutory notice periods alone run more than three months after a notice of default, and other states can take a year or longer. You advance the costs, and you get the property back in whatever condition it is in.
Yes, if the note is secured by a recorded deed of trust or mortgage. You follow your state’s foreclosure process. In California a purchase-money loan on a home generally cannot be pursued for a deficiency after foreclosure (Code of Civil Procedure §580b), so the property is your only recovery.
Yes, but you can usually spread it. Under the installment method you report gain as you receive principal, rather than all in the year of sale (IRC §453). Depreciation recapture on equipment is taxed in the year of sale regardless, and unrecaptured §1250 gain is recognized first out of each payment. Interest is ordinary income.
The interest you receive is taxed as ordinary income each year. The principal splits into return of your basis (untaxed) and gain (capital gain rates if long-term). You report both on Form 6252 each year.
The applicable federal rate for the note’s term and month. For October 2026 it is 4.25% (3 years or less), 4.61% (over 3 to 9 years) and 5.22% (over 9 years), annual compounding. If you charge less, the IRS treats part of the price as interest (IRC §§483 and 1274).
Yes. If total installment notes outstanding at year end exceed $5,000,000, an interest charge applies on the deferred tax above that amount (IRC §453A). Personal-use property like a home, and farm property, are exempt. On an $8,000,000 non-farm sale with $6,000,000 of unrecognized gain, the first-year charge is about $31,500 at a 7% rate.
Not usually if you finance only a few sales and keep the terms inside the Regulation Z exclusions (12 CFR §1026.36(a)(4) and (a)(5)). Those limit you to three or fewer properties in 12 months, or only one, and set terms on amortization and rate adjustments. Confirm with a real estate attorney.
Yes. Many California sales use carryback financing. State rules on foreclosure and deficiency apply, including Civil Code §2924 for the foreclosure process and Code of Civil Procedure §580b for purchase-money loans. Have a California real estate attorney draft the documents.
Yes, but note buyers pay a discount to the balance, and the discount depends on the buyer’s credit, the down payment, the lien position and the rate. Do not plan around a particular price. A structured installment sale avoids the question because the payments do not depend on the buyer.
In a seller carry back you lend the buyer part of the price and rely on the buyer to pay. In a structured installment sale the buyer pays the full price at closing and a separate company, funded by a fixed annuity from a life insurer, owes you the payments. Both can spread the tax under IRC §453. Only one makes you the lender.
No. Seller carry back, carryback financing, owner financing, purchase-money financing and seller financing all describe the seller extending credit to the buyer. A structured installment sale is different: the buyer pays in full and the seller is not the lender.
A wraparound is a carryback note that includes your existing loan. The buyer pays you, you keep paying your lender. The risk is your lender’s due-on-sale clause, which can let it call your loan when title transfers, though federal law limits that in some cases.
A carried note in a 1031 exchange is generally boot, which is taxable in the year of sale unless handled inside the exchange. If you are mixing a 1031 with a note, talk to your qualified intermediary and tax adviser first.
The note passes to your heirs. The unpaid gain in it is income in respect of a decedent, taxable to them as they collect, with no step-up in basis (IRC §691). Plan who holds the note.
Yes. Carry a smaller note, require a large down payment, take first position, use a servicer and title insurance, and consider structuring the rest of the price so a separate company owes you those payments.
If the buyer can pay in full, yes: an installment sale where the buyer pays at closing and a separate company, funded by an annuity, pays you on a schedule. If the buyer cannot pay in full, your options are a price cut, a smaller carried note, or finding another buyer.
The first 15-minute scope call is free. A written analysis is $5,000. The calculators and this page are free.
A plain-English guide for sellers on how a structured installment sale can help you net more after tax when you sell a business, practice, or property. It covers the math, the alternatives, and how to tell if your deal fits.
Leave your details and the PDF downloads right away. Within one business day Hans will email a preliminary read on which structure fits your deal. No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. General education, not tax or legal advice for your situation.
