Last year i bought a single family home from the owners, it was their primary residence. The seller made me a mortgage with 0% interest since i was hitting their sales price number. My CPA says I have to pay them a minimum interest rate, but I know others have done this same type of terms purchase successful without interest. Any one here do this and how did you do it? Thank you for any insights.
Bought a house on creative financing, CPA says I messed up.
byu/HenleyShade inrealestateinvesting
Posted by HenleyShade
2 Comments
Your CPA isn’t being overly cautious—you’re running into imputed interest rules, and the IRS wins this one every time.
I’ve seen a lot of “0% seller finance” deals, but on the tax side they’re never actually 0%. The IRS will impute interest at AFR whether you like it or not.
What that means in practice:
• Seller reports interest income (even if no cash interest was paid)
• Part of your payments get treated as interest, not just principal
Where people get tripped up is thinking “others have done this fine”—yeah, because no one looked closely, not because it was structured correctly.
Clean ways this is usually handled:
• Write the note at AFR and be done with it
• Or intentionally structure with OID/imputed interest and account for it properly each year
The deal itself isn’t the problem—it’s pretending the interest doesn’t exist that causes issues.
If this ever gets reviewed, the IRS will recharacterize it anyway, so you might as well structure it right up front.
Ask your attorney who reviewed the document. They may be able to help.