Seller financing math: a real Wichita 16-unit example

I get this question constantly: "If I sell to you with seller financing, what does the math actually look like?"

Better than walking through it abstractly, here's a representative example based on the kind of Wichita acquisitions we underwrite. The numbers are illustrative, not from a specific transaction. The mechanics are real.

This is illustrative math, not tax advice. Talk to your CPA before structuring any actual sale.

The deal: 16-unit Wichita walkup, $900,000 purchase price

The property:

• 16 units, 1972 vintage, Wichita's College Hill submarket
• Current rents averaging $725 per door
• Seller-owner has held it since 2008, original cost basis around $400,000
• Current accumulated depreciation around $250,000, so adjusted basis is $150,000
• No mortgage

The seller's two choices:

1. Sell for cash at $900,000.
2. Sell for the same $900,000 with seller financing: $200,000 down, $700,000 carried at 7% interest over 10 years, monthly principal-and-interest payments.

Path 1: cash sale at $900,000

Sale proceeds: $900,000. Adjusted basis: $150,000. Gain on sale: $750,000.

That gain breaks into two pieces under IRS rules:

• Depreciation recapture. $250,000 of the gain is recaptured at a federal rate of 25% (Section 1250 unrecaptured gain). That's $62,500 in federal tax. State adds more depending on the seller's filing situation.
• Long-term capital gains. $500,000 of the gain is taxed at federal long-term capital gains rates (15% or 20% depending on income), plus 3.8% Net Investment Income Tax for higher earners. Call it 18.8% to 23.8% on $500,000. Roughly $94,000 to $119,000.

Total federal tax on a cash sale: roughly $156,000 to $182,000, all due in the year of sale.

Net to seller after federal tax (state varies): roughly $720,000 to $745,000.

Path 2: seller-financed sale, same headline price

Same $900,000 price. Same $750,000 gain. The mechanics change because of IRC Section 453, the installment-sale rules.

Down payment: $200,000. Note: $700,000 over 10 years at 7% interest, monthly P&I payments.

What changes for taxes:

• Depreciation recapture is not deferred. $250,000 of recapture is recognized in the year of sale, regardless of installment treatment. That's the same $62,500 federal tax due in year one.
• Capital gain is recognized as principal is collected. The $500,000 of long-term gain spreads across the life of the note. Each year, the seller recognizes a proportion of the principal received as gain, taxed at long-term rates.
• Interest income is taxed as ordinary income each year as it's received. On a 7% note, that's roughly $40,000 to $48,000 in year one, declining as the principal is paid down.

Year one tax bill in the seller-financed version: depreciation recapture ($62,500) plus the small amount of capital gain on the down payment plus tax on year-one interest income.

Compared to the all-at-once cash version, year one tax in the seller-financed version is roughly $70,000 to $90,000, instead of $156,000 to $182,000. The other $80,000 to $100,000 spreads across years 2 through 10.

That's the appeal: the seller stretches gain recognition over a decade, smoothing tax exposure into brackets they may control more cleanly, while collecting 7% interest on the carried portion.

What does the seller actually receive over time?

On a $700,000 note at 7% over 120 months, monthly P&I is roughly $8,130. That's about $97,560 per year. Over the full 10 years that's $975,560 in payments on the note, of which $700,000 is principal repayment and $275,560 is interest income.

Add the $200,000 down payment.

Total received over 10 years: $1,175,560.

Total in the cash-sale version: $900,000 received at closing.

The seller-financed version pays out $275,560 more in nominal dollars, against time-value-of-money and credit risk on the note. Worth it for many owners. Not worth it for owners who want a clean exit and to redeploy the capital fast.

What are the risks the seller takes?

Three to be honest about.

Default risk. If the buyer stops paying, the seller forecloses and gets the property back. We've never defaulted on a note we've issued, and the property is the collateral, worth more than the unpaid balance, but the seller still goes through the legal process to take it back.

Interest-rate risk. The seller is locked in at 7% for 10 years. If market rates rise, the note is worth less in current-value terms. If market rates fall, the seller wins.

Inflation risk. Fixed-rate dollars in year 10 buy less than year-one dollars. A 7% note in a 4% inflation environment yields a real return of 3%, not 7%. Reasonable returns, not stunning ones.

When does seller financing make sense?

It's a good fit when:

• The seller doesn't need 100% of the proceeds in year one.
• The seller is in a high tax bracket and wants to smooth gain recognition.
• The seller wants ongoing income, not redeployable capital.
• The buyer can pay a meaningfully higher headline price because of the carried financing.

It's the wrong fit when:

• The seller has a 1031 exchange in motion that needs the full proceeds.
• The seller has near-term liquidity needs (medical, divorce, business funding).
• The seller doesn't want any ongoing relationship with the property.

If you want to talk through how this would work for your specific situation, reach me directly. To read more about what we buy in Kansas, the Wichita market page covers our submarket focus, and the Kansas state page covers Kansas City and the rest of our Kansas activity.

For the broader framework, the seller financing pillar page walks through subject-to, wraparound, and full-payoff structures.