Selling for cash can put decades of gain into one tax year. Here is how the installment method lets NYC owners who finance their buyer pay tax as the money comes in, with a worked $1 million example.
This article explains general federal and New York tax rules as of October 2026. Tax law changes, and the right answer for you depends on your income, how you used the property, and how the deal is written. Talk to a CPA and a New York real estate attorney before you sign a contract or agree to finance a sale.
If you bought a two-family house in Queens or a small walk-up in Brooklyn decades ago, you are probably sitting on a large gain. When you sell for cash, whether the buyer pays from savings or with a bank loan, the IRS generally taxes the entire gain in the year of the sale. A gain that took 30 years to build is taxed in one year.
Several taxes stack on top of each other:
Seller financing changes the timing. When you carry a note for the buyer instead of taking all cash at closing, the tax code generally lets you pay tax on the gain as you collect the money. This is called the installment method.
The installment method comes from Section 453 of the Internal Revenue Code. An installment sale is one where you receive at least one payment after the end of the tax year in which the sale closes. A typical seller-financed deal fits: the buyer pays a down payment at closing, then makes monthly payments on a note you hold, secured by a mortgage on the property.
Each year, you multiply the principal you actually received by the gross profit percentage. That is the gain you report for the year. The rest of each principal payment is a tax-free return of your basis.
The interest the buyer pays you is not part of the gain. It is taxed as ordinary income in the year you receive it, federally, by New York State, and by New York City if you are a city resident. It also generally counts as investment income for the NIIT.
If the sale qualifies, the installment method applies unless you elect out. You report it on IRS Form 6252 for the year of sale and for each later year in which you receive a payment. Electing out (reporting the whole gain in the year of sale) generally must be done on a timely filed return and generally can't be revoked without IRS consent, so make that choice with your CPA.
If the property was your main home, part of the gain may qualify for the federal home sale exclusion. In general, the excluded gain is left out of the gross profit, and the installment method spreads the taxable gain that remains.
The installment method changes when you are taxed, not how much gain there is. Any savings come from spreading the gain over more years, which can keep more of it in lower brackets and below the NIIT thresholds, and from earning interest on money that would otherwise have gone to taxes at closing.
A long-time owner sells a small building for $1,000,000. Her adjusted basis is $400,000, so her gross profit is $600,000. The buyer is not taking over any existing mortgage, so the contract price is the full $1,000,000 and her gross profit percentage is 60%.
| Deal term | Amount |
|---|---|
| Sale price | $1,000,000 |
| Adjusted basis | $400,000 |
| Gross profit | $600,000 |
| Gross profit percentage | 60% |
| Down payment at closing | $150,000 |
| Seller-financed note | $850,000 |
| Interest rate (illustrative) | 9.4% fixed |
| Amortization | 30 years, monthly payments |
| Monthly payment (principal and interest) | About $7,085 |
| Balloon | Balance due at the end of year 5 (about $817,500) |
A 30-year amortization with a 5-year balloon keeps the monthly payment manageable for the buyer, and the seller usually gets most of the money back when the buyer refinances with a bank. Early in a 30-year schedule, most of each payment is interest, so little principal is paid down before the balloon.
| Year | Principal received | Gain taxed: installment sale (60%) | Gain taxed: cash sale | Interest income (ordinary) |
|---|---|---|---|---|
| Year 1 (includes $150,000 down) | $155,400 | $93,200 | $600,000 | $79,700 |
| Year 2 | $5,900 | $3,500 | $0 | $79,100 |
| Year 3 | $6,500 | $3,900 | $0 | $78,600 |
| Year 4 | $7,100 | $4,300 | $0 | $77,900 |
| Year 5 (includes $817,500 balloon) | $825,200 | $495,100 | $0 | $77,200 |
| Total | $1,000,000 | $600,000 | $600,000 | $392,600 |
Figures are illustrative and rounded to the nearest $100, so columns may not add exactly. They ignore selling costs, depreciation and recapture, and the home sale exclusion, and treat each year as 12 monthly payments. Real results depend on your closing date, because taxes follow the calendar year.
To spread the gain more evenly, change the structure: a later balloon, scheduled principal paydowns, or a fully amortizing note all spread the gain over more years. If the buyer refinances or sells early and pays you off, the remaining gain is generally taxed in the year you receive that money.
If you rented out the property, you took, or were allowed to take, depreciation. Under Section 453(i), recapture that is taxed as ordinary income under Sections 1245 and 1250 is generally recognized in full in the year of sale, even if you receive little cash that year.
For a rental building depreciated straight-line, which is how residential rental buildings are generally depreciated today, this ordinary-income recapture is usually small or zero. It can be larger if you separately depreciated items such as appliances or carpeting, or used a cost segregation study.
The bigger piece for most landlords is unrecaptured Section 1250 gain, the part of your gain that comes from straight-line depreciation on the building. It is taxed at a maximum federal rate of 25%. This portion does go on the installment method, but under IRS regulations it generally comes out first, so the gain in your earliest payments may be taxed at up to 25% before the regular capital gains rates apply.
The IRS publishes Applicable Federal Rates (AFRs) every month, with short-term, mid-term, and long-term rates based on the length of the note. If your note charges less than the applicable AFR, the imputed interest rules in Sections 483 and 1274 generally treat part of the principal as interest. That turns some of your capital gain into ordinary interest income, changes the buyer's basis, and with family members can raise gift tax questions.
For an arm's-length sale, this is rarely the issue. Seller-financing rates are often set about 2 percentage points above the national 30-year mortgage average from Freddie Mac's weekly survey, currently 7.40%. That puts a typical seller-financing rate near 9.40%, generally well above the AFR. Still, have your CPA check the current AFR table before you set the rate, especially if you plan to give a relative or long-time tenant a below-market rate.
There is also a ceiling. New York's civil usury limit is generally 16% a year. Whether and how the usury rules apply to a particular seller-financed note is a question for your attorney, but a note priced in the normal seller-financing range sits well below that line.
For many long-time owners, the appeal is also the income. A seller-financed note turns a building into a monthly check without tenants, repairs, or vacancies. In the example, the buyer pays about $7,085 a month, roughly $85,000 a year in principal and interest, at a rate typically well above what savings accounts and CDs pay.
The trade-off is that you become the lender. If the buyer stops paying, your remedy is foreclosure, and in New York foreclosure goes through the courts and can be slow and expensive. Taking the property back also has its own tax rules, generally under Section 1038.
Most of your protection comes from how the deal is set up:
New York generally starts from your federal income, so the installment gain you report federally each year flows through to your New York return. A few New York points deserve attention:
Some owners plan to sell on installment, live on the payments, and leave the note to their children. That can work, but the tax result differs from leaving the property itself.
If you hold real estate until death, your heirs generally receive a stepped-up basis equal to its value at your death, which can erase the built-in gain for income tax purposes. An installment note does not get a step-up. The unpaid gain is "income in respect of a decedent," and your heirs generally pay income tax on it as they collect the remaining payments.
So if your main goal is to pass the property to heirs, selling on installment can cost the family more in income tax than holding. If you want out of the property now, the comparison looks different. Decide this with a CPA and an estate attorney.
An installment note generally isn't like-kind property, so carrying a note doesn't by itself fit into a 1031 exchange. Combining the two is sometimes possible, but it requires a qualified intermediary set up before closing and careful planning with a CPA.
For the mechanics of a deal, read how seller financing works in New York, or compare it with a traditional sale in seller financing vs. a bank mortgage. When you are ready, list your property on SellerFinanceNYC and hear directly from buyers looking for owner financing.
Not directly. The installment method changes when your gain is taxed, not how much gain there is. Spreading the gain across several years can lower the total tax if it keeps more of the gain in lower federal and New York brackets or below the 3.8% Net Investment Income Tax thresholds, but the result depends on your other income and on future tax law. You also earn interest on the note, which is taxed as ordinary income.
Interest is taxed separately from your gain, as ordinary income in the year you receive it. It is generally subject to federal income tax, New York State income tax, and New York City income tax if you live in the city, and it generally counts as investment income for the Net Investment Income Tax. A loan servicer can send you a year-end statement showing how much of each payment was interest.
When the buyer pays off the balance, you receive the rest of your principal, and the remaining deferred gain is generally taxed in that tax year. It works the same way as a balloon payment, only sooner. Because a buyer may refinance well before the balloon date, plan for the possibility that a large share of your gain, and the tax on it, could arrive earlier than you expected.
Yes. New York State and New York City real property transfer taxes are generally based on the full sale price and are due at closing, whether the buyer pays cash, uses a bank loan, or signs a note with you. The installment method affects income tax, not transfer taxes. Make sure the down payment is large enough to cover these taxes along with your other closing costs.
Yes. An installment note can pass to your heirs, and they keep collecting the payments. But unlike real estate held until death, the note does not get a stepped-up basis. The unpaid gain is treated as income in respect of a decedent, so your heirs generally pay income tax on it as the payments come in. Compare this with holding the property, with help from a CPA and an estate attorney.
See NYC properties where owners offer financing, or list yours and set your own price, rate and balloon.
Open the Live Map List your propertyThis article is general education, not legal, tax, lending or investment advice. Seller-financing terms are negotiated between buyer and seller and every deal is different. Before signing anything, have a New York real estate attorney review the contract, note and mortgage, and talk to a CPA about the tax side. Rates shown update weekly from Freddie Mac's national survey; the seller-finance figure is a rule of thumb, not a quote.