Tax implications of owner financed property sale

[Alternatepriorities]

I have some elderly friends who are selling a business property. It was bought and run as a general store in 2005 then converted to a BNB a decade ago and rented out for that since. Purchase price 140k, sale price 180k owner financed 25k down and rest paid out monthly over 12 years with 5% interest. They asked me about the tax implications and I'm not sure how to phase the question to google for an owner financed sale.

Will the capital gains tax be due on the whole amount in the year of sale? What about the depreciation recapture? I assume the interest on the owner financing would be counted in the year it was paid?

There are no local or state taxes involve since they live on the very edge of nowhere.

[secondcor521]

The phrase you're looking for is "installment sale".  They're discussed in IRS Pub 537 at https://www.irs.gov/publications/p537.

Depreciation recapture is recaptured in the year of sale.  See https://www.irs.gov/publications/p537#en_US_2023_publink1000221670.

Capital gains are prorated based on when the payments are received (so spread out over the 12 years in your example).

Yes, interest is reported in the year received (so spread out over the 12 years in your example).

For capital gains vs. interest, they should probably run an amortization schedule so they can properly allocate the payments between the two.

As cash basis tax payers, they need to report based on when the payments are actually received.  So if the buyer makes the December payment in January, they should adjust for that appropriately.

[Alternatepriorities]

Thank you secondcor521!

That was really helpful and gave me a great start on helping my friends.