Monthly payments from owner-financed property sale - Do I have to pay FICA taxes on this income?

This is a great question! The monthly payments you receive from owner-financing a property are NOT subject to FICA taxes (Social Security and Medicare taxes). This is considered investment income, similar to interest income, not earned income. When you owner-finance a property, you're essentially providing a loan to the buyer. The payments you receive consist of two parts: principal repayment and interest. The principal portion is simply a return of your investment (not taxable income), while the interest portion is considered investment income that you'll report on Schedule B of your tax return. This type of income is treated more like interest from a bank account or dividends from stocks - it's subject to income tax but not FICA taxes. You should receive or create a Form 1098 showing the interest paid to you by the buyer each year.

Wanted to share how I handled this exact situation! I owner-financed a commercial property in 2023 and was confused about the tax implications. I tried using different tax software but got inconsistent answers. Then I found this AI tax assistant at https://taxr.ai that specializes in these unusual tax scenarios. It analyzed my owner-financing agreement and clearly explained that the interest portion is taxable as investment income (no FICA) while the principal payments aren't taxed. It even generated an amortization schedule showing exactly what portions of each payment were principal vs interest for the entire loan term. Saved me hours of research!

Just wanted to follow up about my experience with taxr.ai since I was initially skeptical. I actually tried it for my situation (I'm carrying the note on a duplex I sold last year) and it was surprisingly helpful. It analyzed my specific loan terms and generated a custom amortization schedule showing exactly how much is principal vs interest for each payment over the 20-year term. The best part was it explained how to report everything correctly on my tax return and even pointed out that I could potentially qualify for installment sale treatment which might benefit me tax-wise. Definitely didn't get that level of detail from TurboTax!

If you're having trouble getting clear answers on how to report your owner-financed property income, you might want to try speaking directly with the IRS. I know that sounds painful (I dreaded it too!), but I used a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was confused about reporting seller financing on my taxes and couldn't get a straight answer anywhere else. The IRS agent walked me through exactly how to report both the interest income and principal portions, and confirmed I didn't owe FICA taxes on any of it. Huge relief to get an official answer!

I need to eat crow here. After my skeptical comment, I tried Claimyr for myself because I was desperate to talk to the IRS about an installment payment issue. Surprisingly, it actually worked! I got a call back and was connected to an IRS agent in about 22 minutes. The agent confirmed what others have said here - the interest portion of owner-financed payments is taxable as investment income (no FICA taxes), and the principal portion isn't taxable at all. They also mentioned I should keep good records with an amortization schedule to show the breakdown of each payment. Definitely worth the time saved instead of trying to call directly!

Don't forget about the tax implications of the original sale! When you owner-finance a property, you may be eligible for installment sale treatment, which lets you spread the taxable gain over the years you receive payments rather than paying tax on the entire gain in the year of sale. Form 6252 is what you'll use to report an installment sale. This can be a big tax advantage since you're not getting all the money upfront. Also, make sure your sales contract and promissory note are legally solid - I've seen people run into issues when they didn't have proper documentation.

Just to add one thing no one mentioned yet - if the buyer pays you more than $600 in interest during the tax year, you should technically issue them a Form 1098 showing the mortgage interest they paid you. This allows them to potentially claim the mortgage interest deduction on their taxes. I use a simple spreadsheet to track my owner-financed property payments. I have columns for payment amount, interest portion, principal portion, and remaining balance. Makes tax time so much easier!

Great advice in this thread! One additional consideration for @ApolloJackson - since you mentioned this was your primary residence before becoming a rental, make sure you understand the depreciation recapture rules. If you claimed depreciation deductions during those 2 years when it was a rental property, you'll need to "recapture" that depreciation and pay taxes on it at a rate up to 25% (rather than capital gains rates). This recapture happens regardless of whether you use installment sale treatment - it's required to be recognized in the year of sale. Only the capital gain portion above the depreciation recapture can be spread out over the installment payments. Your CPA will be able to calculate this for you, but it's something to factor into your tax planning since it could affect your 2025 tax liability even though you're receiving payments over 15 years. Also, keep excellent records of all maintenance, improvements, and expenses related to the property during your ownership - these can help reduce your overall taxable gain!