When is the Tax on the Sale Paid?

The seller determines the timeline and amount of payments (interest and principal) to be made. These payments can be structured according to the seller's preferences, such as 'interest only' with the principal paid in a balloon payment at the end, or with even payments over the term of the structure. Taxes on the gain are triggered upon receipt of principal payments. Capital gains rates applicable in the year of payment apply to principal payments received, while interest earned on the principal is taxed at ordinary tax rates in the year received. Most clients opt for a 10-year term with the option to renew for another 10 years at 9 years and 6 months, which can be done repeatedly. The position can also be inherited by the noteholder's heirs, who can continue the process.