Seller Financing in Florida: How Owner Financing Works for Sellers, the Risks and the Tax Treatment

If you are looking into seller financing Florida rules, the idea is simple: the seller acts as the bank. Instead of the buyer getting a loan from a lender, the buyer pays the seller over time, and the home or land secures the debt. It can help sell a property that is hard to finance, such as a rural lot or a home that needs work.

However, it also turns you into a lender, with the risks and paperwork that come with that role. This guide is written for sellers. For a general overview from the buyer's side, see our guide to how owner financing works.

Key takeaways

• A seller-financed sale uses two main papers: a promissory note (the promise to pay) and a mortgage (the lien on the property).
• Florida charges documentary stamp tax of 35 cents per $100 on the note and a nonrecurring intangible tax of 2 mills (0.2%) on debt secured by Florida real estate.
• If the buyer stops paying, a Florida seller must foreclose through the courts, which takes time and money.
• Federal rules let a person seller-finance one property a year with fewer restrictions, if the loan meets certain terms.
• An installment sale can spread capital gain over the years you collect payments, reported on IRS Form 6252.

How seller financing in Florida works

The buyer and seller sign a normal purchase contract, plus financing terms. At closing, the seller deeds the property to the buyer. In return, the buyer signs a promissory note for the unpaid balance and a mortgage that gives the seller a lien on the property.

The buyer usually pays a down payment at closing. After that, they make monthly payments to the seller, often through a loan servicing company. When the loan is paid off, the seller records a satisfaction of mortgage and the lien goes away.

This differs from a lease-option or a contract for deed, where the seller keeps title until later. With a note and mortgage, the buyer owns the property from day one. As a result, the seller's protection is the mortgage, not the title.

Common terms for seller financing in Florida

Every deal is negotiated, but most cover the same points:

• Down payment. A larger down payment gives the buyer more to lose and gives you a cushion if values fall.
• Interest rate. Often set near or above bank rates, since you are taking on more risk than a bank would.
• Length and balloon. Many seller loans run a few years, then require a lump-sum payoff, so the buyer must refinance or sell.
• Late fees and default terms. These should be spelled out in the note.
• Taxes and insurance. The note and mortgage should require the buyer to keep both current and name you on the insurance.

Florida taxes when you use seller financing

Florida taxes the debt itself when the papers are signed and recorded. Two taxes apply.

Documentary stamp tax on the note

Under section 201.08 of the Florida Statutes, documentary stamp tax on promissory notes and mortgages is 35 cents for each $100 of the debt, or part of $100. So a $200,000 note carries $700 in stamps. This is on top of the usual stamp tax on the deed itself.

Nonrecurring intangible tax on the mortgage

The Florida Department of Revenue also charges a one-time intangible tax of 2 mills on debt secured by a mortgage on Florida real property. You multiply the amount by 0.002, so a $200,000 mortgage carries $400. It is paid when the mortgage is recorded.

The Department of Revenue treats the lender as the taxpayer, but the lender may pass the cost to the borrower. In a seller-financed deal, you are the lender, so decide in the contract who pays. Many sellers ask the buyer to cover these costs, as a bank would.

Federal rules on seller financing Florida sellers should know

The Dodd-Frank Act changed how home loans are made, and some of its rules can reach sellers who finance a sale. The Consumer Financial Protection Bureau's Regulation Z has two seller exclusions from the loan originator rules.

The one-property exclusion

A natural person, an estate or a trust that finances only one property in any 12-month period can qualify. The seller must not have built the home as part of a business. The loan must not have negative amortization, and the rate must be fixed or adjustable only after five or more years, with reasonable caps.

The three-property exclusion

A seller who finances three or fewer properties in a 12-month period may also qualify. However, the loan must be fully amortizing, so no balloon payment. The seller must also make a good-faith check that the buyer can repay.

These rules are technical, and other federal and state laws may apply too. Have a Florida real estate attorney draft the papers and review whether your deal fits an exclusion.

The risks of seller financing in Florida

The main risk is simple. The buyer may stop paying.

Default and foreclosure

Florida law says all mortgages must be foreclosed in equity, which means through a court case. You cannot just change the locks. A foreclosure can take months or longer, and you will pay attorney fees along the way. Meanwhile, the property may sit empty or fall into poor repair.

If you win, the property goes to a court sale. You may bid your debt to take it back, or another bidder may buy it. Either way, you will likely get less than you hoped, after costs.

Other risks to plan for

• Your own mortgage. If you still owe a bank, your loan may have a due-on-sale clause. Selling with your loan still in place can trigger it.
• Unpaid taxes or insurance. If the buyer lets the policy lapse or skips property taxes, your security is at risk.
• Tied-up cash. Your equity comes back slowly, not at closing.
• Servicing. Tracking payments, year-end interest statements and escrow takes time. A third-party loan servicer can help.

How seller financing in Florida is taxed

An installment sale can spread out your federal tax bill. The IRS defines it as a sale where you receive at least one payment after the year of sale. You report it on Form 6252 in the year of sale and each later year you receive payments, unless you choose to report the full gain at once.

Each payment has three parts: a return of your basis, a share of your gain, and interest. The interest is ordinary income. The IRS also uses applicable federal rates to check whether a loan carries enough stated interest.

Some gain cannot be spread out. For example, depreciation recapture on a rental property is taxed in the year of sale. Losses and some other sales cannot use the installment method at all. See our guide to taxes when selling a house in Florida and talk to a tax adviser before you agree to terms.

Why rural lots often sell this way

Raw land and rural lots can be hard to finance through a bank. Many lenders want larger down payments for land, and some will not lend on it at all. As a result, owner financing is common for vacant lots in western Palm Beach County, such as in The Acreage.

Check local details first. The Acreage is an unincorporated area run by Palm Beach County, while Loxahatchee Groves is its own incorporated town with its own rules. Zoning, road maintenance and permits differ, and a buyer will ask about them. In Port St. Lucie, older vacant lots can also draw seller-financed offers from buyers who plan to build.

Buyers looking at land should read our guide to financing land with the owner.

Is carrying the loan right for you?

Seller financing tends to fit sellers who own the property free and clear and do not need all their cash right away. It can also suit a property that banks avoid, or a buyer with a solid down payment but a thin credit file.

On the other hand, it is a poor fit if you need the full proceeds to buy your next home. It is also risky if you cannot afford a long foreclosure. Before you decide, compare your likely net from a regular sale with the payments you would collect, after taxes, servicing and the chance of default. A listing agent can show you what a traditional sale would bring today.

Steps to set up a seller-financed sale

1. Decide your minimum down payment, rate and term before you list.
2. Run a credit report and check income, with the buyer's written consent.
3. Hire a Florida real estate attorney to draft the note and mortgage.
4. Close through a title company so the deed and mortgage are recorded correctly.
5. Set up a servicer or a clear system to track payments, taxes and insurance.

Frequently asked questions

Is seller financing in Florida legal?

Yes. Florida sellers can finance a sale with a note and mortgage. Federal rules may apply, depending on how many properties you finance and the loan terms.

Who pays the doc stamps and intangible tax?

The parties decide in the contract. The lender is the taxpayer for intangible tax but may pass it on, and many sellers ask the buyer to pay both.

What happens if the buyer stops paying?

You must foreclose through the courts, since Florida requires foreclosure in equity. Expect legal fees and a wait of months or more.

Can I offer seller financing in Florida if I still have a mortgage?

It is risky. Many mortgages have a due-on-sale clause. Speak with your lender and an attorney before you agree to anything.

Sources

• Florida Statutes section 201.08: Tax on promissory notes and mortgages
• Florida Department of Revenue: Nonrecurring intangible tax
• Section 702.01, Florida Statutes: Foreclosure in equity
• Consumer Financial Protection Bureau: Regulation Z, section 1026.36
• IRS Topic 705: Installment sales
• Town of Loxahatchee Groves

This article is general information, not legal, tax or financial advice. Seller financing involves lending and tax rules that depend on your facts, so speak with a Florida attorney and a tax adviser.

Weighing seller financing against a regular sale? Compare a cash offer vs. listing with a Pure Equity agent, with no obligation. Contact Pure Equity or check your home value. Buying land or a home with owner financing? Our agents can help you review the terms.