Benefits for the seller - One of the biggest advantages for the seller is that holding paper equates to an installment sale, which is a mechanism for deferring capital gains tax. The seller only pays capital gains tax as the principal balance is paid down. An interest-only seller-held note offers the greatest opportunity for savings as no principal is paid down during the term of the note.
This tax benefit is so compelling that a vehicle called a Deferred Sales Trust has been developed to take advantage of the installment sales rules to allow sellers to defer taxes without holding paper. Refer to the web reference provided below.
Benefits for the buyer - the seller might be the only source available to finance a particular project, or may offer better terms including higher leverage, a lower rate, or a longer amortization. A buyer can potentially, when permitted by the lender with the first trust, to secure a second mortgage from the seller to garner even greater leverage.
Feb 22, 2009