Seller Financing and Installment Sales in California
If you’re in this spot: you inherited a house or own a long-held rental, and a cash sale would hand a big chunk to taxes. Seller financing can spread that tax over years and turn your equity into monthly income.
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Please note: This is general information, not tax or legal advice. Consult a CPA or attorney about your situation.
How it works
The buyer pays a down payment, then pays you the rest over time with interest. A recorded deed of trust secures it. You generally pay tax on the gain as you receive principal, not all in the year of sale (IRC §453).
Why it can beat cash: sell outright and you lose a big share to taxes and costs, and the rest may earn little in the bank. Carrying the loan keeps more of your money earning.
Key rules
- Interest rate. Charge at least the IRS minimum rate (AFR). For November 2026 the annual rates are 4.67% short-term, 5.08% mid-term and 5.52% long-term, and they change monthly. For seller notes up to $7,462,600 (2026), the IRS test rate is capped at 9%.
- No true 0% loans. “Interest-free” seller loans usually aren’t tax-free. The IRS generally treats part of each payment as interest anyway, so have a CPA run the numbers.
- Recapture. Depreciation recapture is taxed in the year of sale, even before you’re paid.
- Very large sales. An extra interest charge can apply when the sale is over $150,000 and your total installment notes top $5 million.
California notes
California generally follows installment reporting but taxes the gain as ordinary income, up to 13.3%. Withholding is 3 1/3% of the down payment, then the buyer withholds on each later principal payment unless the FTB approves otherwise.
Common mistakes
- Charging below the AFR
- Not recording the deed of trust
- Forgetting recapture
- Skipping the buyer’s credit check
Example (hypothetical)
You sell a rental for $600,000. Your basis is $200,000, so the gain is $400,000. You take $100,000 down and carry $500,000. Two-thirds of each principal dollar is gain, so in year one you report about $66,700, not $400,000.
Want to close later instead of carrying a note? See options and lease-options. Prefer to keep investing in real estate? Compare a 1031 exchange. Back to the full guide to selling in California and legally reducing taxes.
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“I’m Erwin Miciano. I started SoCal Property Resolution because the families I met weren’t looking for a flashy cash offer. They were stuck: a house split between relatives, a probate case that wouldn’t move, a tax bill nobody knew about. My job is to explain your options honestly. Sometimes that means buying, and sometimes it means pointing you somewhere else.”
Frequently asked questions
Can I sell my house with seller financing in California?
Yes. The buyer pays a down payment and pays the rest over time, secured by a recorded deed of trust.
Can I offer a 0% interest seller loan?
Usually not without tax consequences. The IRS generally treats part of each payment as interest anyway. Charge at least the AFR and have a CPA check the numbers.
Is depreciation recapture spread out too?
No. Depreciation recapture is taxed in the year of sale, even before you receive the payments.
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Get My OptionsCall (619) 996-0830This is general information, not tax or legal advice. Consult a CPA or attorney about your situation. SoCal Property Resolution is a real estate investment company that may buy property or ownership interests as a principal. We are not attorneys, tax advisors, real estate agents or a government agency. Figures were checked October 2026 and change over time; confirm current rules with a qualified California CPA or attorney before you act.
