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Seller note explained for agents: how it closes deals
A seller note is the buyer's IOU to the seller for part of the price, paid over time with interest, usually secured by the property or, in a business sale, by the business assets and a personal guaranty. It closes deals because it fills the gap between what the buyer can bring to closing and what the seller wants. The catch: the seller becomes the buyer's lender, and the cash at closing, where your commission is paid from, shrinks by the size of the note. A structured installment sale also pays the seller over time, but the buyer pays in full at closing.
Seller note, seller carry back, owner financing: same thing?
Mostly, yes. Agents use the words loosely:
- Seller note: the promissory note the buyer signs to the seller. Common in business sales ("the seller note sits behind the SBA loan").
- Seller carry back (carryback financing): the seller "carries back" part of the price as a note, usually a second deed of trust behind the buyer's lender. Common in real estate.
- Owner financing / seller financing: the seller finances most or all of the price, with no bank. The buyer-side shopper's term.
All three make the seller a lender. That's the part to keep in mind.
How a seller note closes the deal
- The buyer is short. The buyer's lender caps the loan and the buyer's cash runs out. A note for the difference keeps the price where the seller wants it.
- The appraisal came in low. A small second-position note can bridge part of the appraisal gap, if the buyer's lender allows it.
- Business sales with bank or SBA financing. Lenders often want the seller to keep some skin in the game through a note, sometimes on standby (no payments) for a set period. The exact SBA rules are in its SOP 50 10 series and change; get them from the lender for your deal.
- Land and raw ground, where bank financing is thin and buyers expect the seller to carry.
"Would you carry part of it, or would you rather the buyer pay in full at closing?"
That one question sorts sellers into a note, a structured sale, or both.
Typical seller note terms
| Term | Common range | What to watch |
|---|---|---|
| Size | 5% to 20% of the price in real estate; often larger in business sales | The bigger the note, the less cash at closing |
| Interest rate | Negotiated, at or above the IRS minimum | Below the minimum, the IRS imputes interest |
| Term | 3 to 10 years, often with a balloon | A balloon is a refinance risk for the buyer |
| Security | Second deed of trust or mortgage; business assets and a personal guaranty | Second position gets paid after the bank |
| Payments | Monthly, interest only or amortized | Standby periods mean no payments at all for a while |
The IRS minimum rate is the applicable federal rate. For a note signed in October 2026, the base annual rates are 4.25% short-term (3 years or less), 4.61% mid-term (over 3 up to 9 years) and 5.22% long-term (IRS Rev. Rul. 2026-19, October 2026; for a sale, the test is the lowest rate in the three months ending with the month the contract is signed, IRC §1274(d)(2)).
Seller note vs seller carryback vs structured installment sale
| Seller note / carryback | Structured installment sale | |
|---|---|---|
| Buyer pays at closing | Price minus the note | The full price, with normal financing |
| Your commission | Paid from a smaller pile of closing cash | Cash at the table for your full commission |
| Who is the lender | The seller | Nobody: the buyer is paid up at closing |
| If the buyer stops paying | The seller forecloses or sues | Not the seller's problem; the payments are owed by an assignment company |
| Seller paid over time | Yes, at the note rate | Yes, on a schedule the seller picks |
| Tax spread over the payments | Yes (installment sale) | Yes (installment sale) |
| Can be changed later | Note can be sold or paid off early | Fixed once set up |
| Must be set up | Any time before closing | Before closing, never after |
So the seller note fills a cash gap, and the structured sale fills a tax gap. The tax gap is often the bigger one: at a top federal long-term capital gains rate of 20% plus the 3.8% net investment income tax (IRC §1(h) and §1411; 2026 brackets in IRS Rev. Proc. 2025-32, October 2025), plus state tax, a seller who spreads the gain can sometimes take a lower price and still net about what a higher all-cash price would have. That is price room for you to negotiate with.
Using both: a structured sale plus a small note
When the buyer is short of cash and the seller is short of net, the two work together: the buyer's full closing money funds the structured sale, and a small note covers what the buyer can't bring.
Hypothetical, from an example on this site: four farm owners asked $7.0 million; the buyer could bring $5.0 million. A $5.5 million price, structured, with a $500,000 seller note at 6% interest-only for five years, left the owners with about the same after-tax value in today's dollars as the $7.0 million all-cash sale (about $4.74 million vs about $4.72 million). How the example was built.
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What to know
Said once, plainly. A seller note puts the seller in the lending business: if the buyer stops paying, the seller has to foreclose or sue, and a second position gets paid after the bank. A structured sale removes that risk, but its payments are fixed once set up (no speeding them up, borrowing against them or cashing out), they depend on the assignment company that owes them, usually funded by a fixed annuity from a life insurer whose name and ratings are disclosed in writing before anyone signs, and a commission is built into the payout rate, so the rate is lower than a seller note's. Both must be set up before closing; once the money sits with the seller or a 1031 qualified intermediary, a structured sale is off the table. The seller's CPA runs the real numbers.
For the seller's CPA. A seller note and a structured payout in the same deal are one installment sale under IRC §453: one gross profit ratio across every payment (§453(c)); receipt of the buyer's note is not itself a payment (Treas. Reg. §15a.453-1(b)(3)); recapture is recognized in the year of sale (§453(i)); §453A interest applies to obligations over $5 million; unstated interest is imputed under §483 / §1274. Form 6252 each year a payment arrives.
Frequently asked
What is a seller note?
A promissory note the buyer gives the seller for part of the purchase price, repaid over time with interest and usually secured by the property or the business assets. It makes the seller a lender for that part of the price.
Is a seller note the same as a seller carry back?
In practice, yes. Seller carry back is the real estate term for the same thing: the seller carries back part of the price as a note, usually a second deed of trust behind the buyer's lender.
What interest rate should a seller note carry?
Whatever the parties negotiate, but not below the IRS applicable federal rate, or the IRS imputes interest. For October 2026 the base annual AFRs are 4.25% short-term, 4.61% mid-term and 5.22% long-term (IRS Rev. Rul. 2026-19, October 2026).
What happens if the buyer defaults on a seller note?
The seller has to enforce the note: foreclose on the property or pursue the guaranty. In second position, the bank is paid first. That risk is the main trade-off of a seller note.
How is a structured installment sale different from a seller note?
In a structured installment sale the buyer pays the full price at closing, so the seller is not the buyer's lender and there is cash at the table for the full commission. The seller still receives payments over time, owed by an assignment company. It must be set up before closing and cannot be changed afterward.
Does a seller note help with taxes?
Yes, a seller note is usually taxed as an installment sale, so the gain is reported as principal is paid. Depreciation recapture is still taxed in the year of sale.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service, and a licensed insurance agent (CA Insurance License #4273294). He is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.