What are the IRS Rules on Owner Financing?

Owner financing can speed up your sale, attract more buyers, and create a steady income stream—but it also comes with IRS rules you can’t ignore. Understanding tax implications, interest rate requirements, and structured payments is key to maximizing your financial benefits. 

Here’s what every business seller needs to know.

What Is Owner Financing?

Owner financing occurs when the seller of a business becomes a lender, lending the buyer part or all of the purchase price. Instead of securing a traditional bank loan, the buyer repays the seller in installments, typically with interest.

While there are several advantages for sellers, they must structure the deal carefully and ensure the buyer can make the payments. They should also be aware of the tax implications involved.

Understanding the Tax Implications of Owner Financing

Before committing to owner financing, business sellers must understand how the IRS views these deals. While capital gains tax typically applies to the sale of a business and its assets, owner financing introduces another factor—interest income taxation. Let’s break it down.

Capital Gains Tax (CGT)

You may face capital gains tax when you sell an asset for more than its base cost. 

This applies to the sale of investments, properties, and businesses. A business typically has multiple assets that are classified as capital assets when sold. CGT is only applied to the portion of the sale price that exceeds the base price. 

The IRS usually adjusts capital gains income brackets annually to account for inflation. For taxable years beginning in 2024, net capital gains will be taxed at 15% for individuals whose taxable income falls within the following ranges:

• Over $47,025 but less than or equal to $518,900 for single individuals or $291,850 for married couples filing separately.

• Over $94,050 but less than or equal to $583,750 for married couples filing jointly and qualifying surviving spouses.

• Over $63,000 but less than or equal to $551,350 for the head of household.

However, GCT rates can be as low as 0% for lower-income households and 20% for higher-income households. 

With owner financing, the seller receives payments in installments over time, which may allow them to defer CGT obligations, easing the tax burden and offering more financial flexibility.

Interest Income Taxation

With owner financing, a downpayment is followed by regular (typically monthly) interest-bearing payments. This provides the seller with interest income, which can also have tax implications. 

Interest income is taxed as regular income. When a seller finances a business sale, any interest earned on the loan is subject to income tax. The interest received or credited to an account the seller can access is taxable income in the year it becomes available.

IRS Requirements for Interest Rates in Owner Financing

With owner financing, the IRS sets a minimum interest rate called the Applicable Federal Rate (AFR).  

Applicable Federal Rate 

The APR is the minimum interest rate for private loans and owner-financed transactions. It varies based on the loan term and is updated monthly. Visit the IRS Applicable Federal Rates page for details of the current and historical AFR rates for short-, medium-, and long-term loans. 

How to Choose a Compliant Interest Rate

When setting an interest rate for owner financing, the seller is responsible for ensuring it complies with IRS rules. Remember that your interest rate will directly affect the loan terms, and any interest income you earn on the buyer’s payments will be taxable.

While federal law doesn’t limit the interest rate you can set for seller financing, there are key considerations to keep in mind. For example, usury laws—which govern the maximum interest rates allowed on loans—can vary from state to state. 

To ensure compliance, it’s essential to consult with a tax advisor or your local tax authority to avoid exceeding state-specific limits. Baton Market can assist in navigating these complexities by providing market insights and offering support for structuring deals that meet IRS guidelines and state regulations.

Impact of Structured Payments on Seller’s Financial Situation

Owner financing can significantly impact business owners’ financial situation, including income, expenses, and tax obligations. 

The seller receives regular, structured payments after the initial down payment, creating a steady income stream and reliable cash flow. This structure allows the seller to defer capital gains taxes over time as the payments are made, potentially easing the immediate tax burden.

On the other hand, the interest payments received from the buyer may be subject to income tax and, in some cases, could affect the seller’s Alternative Minimum Tax (AMT). This parallel tax system applies mainly to higher-income earners, and sellers need to be aware of its potential impact.

With Baton Market, sellers can maximize their earnings and streamline the seller financing process.

Baton Market Helps Sellers Navigate Owner Financing Regulations

Selling a business is a big move, but Baton Market makes it easier, smarter, and more profitable. We equip sellers with the right tools—private listings to gauge buyer interest, free business valuations to understand market value, and expert support to structure the best possible deal.

Navigating legal and tax requirements can be tricky, but Baton Market connects sellers with professionals who can help. Whether you’re considering owner financing, looking for ways to reduce capital gains taxes, or need guidance on IRS regulations, our experts ensure you stay informed and in control.

With Baton Market, you’re not just selling—you’re making a smarter financial decision that keeps more money in your pocket.

Close the Deal Faster With Baton Market’s Expert Guidance 

Don’t let legal headaches or IRS rules on owner financing slow you down. Baton Market makes selling your business simple and stress-free.

We’ll guide you through the process with qualified buyer vetting and smooth deal execution at a fraction of the cost of traditional brokers. Plus, you’ll close the deal faster. 

Ready to get started? Let’s make it happen with Baton Market today.