Important Disclaimer: Longhorn Money Services is not a tax advisor. The information below is general and educational only — tax laws are complex and individual situations vary. Always consult a qualified CPA, tax attorney, or enrolled agent for advice specific to your circumstances. Tax rules can change; this reflects 2026 understanding.
When you sell your seller-financed land note in Texas, you're selling a capital asset — and that typically triggers taxes. The good news: many note sellers find that even after taxes, converting to cash and reinvesting produces better overall returns than continuing to collect payments.
This comprehensive guide explains the main tax implications in 2026, how gains are calculated, reporting requirements, common strategies to reduce or defer taxes, and real-world examples.
For the full selling process, see our complete guide to selling your land note in Texas.
Basic Tax Treatment: Sale of a Capital Asset
The IRS treats selling a note as a sale or exchange of a capital asset. You pay tax on the gain: sale price minus your adjusted basis.
- Long-term capital gains (held >1 year): 0%, 15%, or 20% federal rate depending on income (plus 3.8% NIIT for high earners).
- Short-term (held ≤1 year): ordinary income rates.
- Texas has no state income tax — a big advantage over many states.
Calculating Your Basis in the Note
Your basis is critical — it determines your taxable gain.
- If you created the note by seller-financing a property sale: basis = original property basis (purchase price + improvements - depreciation) + any costs of sale.
- The down payment reduces basis proportionally if using installment method.
- Example: Sold land for $200K (basis $100K), $50K down, $150K note. Your basis in note ≈ $75K (pro-rata).
See how discounts affect net proceeds after taxes.
The Installment Sale Acceleration Rule
If you reported the original land sale on the installment method (Form 6252), selling the note accelerates the remaining unreported gain into the year of sale.
- All deferred gain becomes taxable now.
- Interest portion of payments received remains ordinary income.
- Partial sales accelerate only the portion sold.
This is the biggest surprise for many sellers — plan ahead!
Capital Gains vs. Ordinary Income Breakdown
Gain breakdown:
- Principal gain: capital gain (sale price - basis).
- Interest received to date: already taxed as ordinary.
- Discounted sale: lower sale price reduces gain (but you get less cash).
| Scenario | Sale Price | Basis | Gain | Tax Rate Example (15%) |
|---|---|---|---|---|
| Full sale at 20% discount | $120K | $80K | $40K | $6K federal |
| Hold to maturity | $150K over years | $80K | $70K spread | Lower annual tax |
Common Tax Deferral or Reduction Strategies
1. Partial Sale
Sell only part of payments — accelerate less gain. See partial vs full sales.
2. 1031 Exchange (Limited Applicability)
Notes are personal property — standard 1031 doesn't apply directly. Some advanced structures exist but are complex and risky.
3. Charitable Remainder Trusts
Donate remainder interest for deduction — sophisticated strategy.
4. Reinvest Proceeds Wisely
Use after-tax cash for Opportunity Zones, retirement accounts, or higher-yield investments.
5. Timing the Sale
Sell in a lower-income year to reduce rate.
IRS Reporting Requirements
- Form 1099-S or 1099-A may be issued by buyer/closer.
- Schedule D for capital gains.
- Form 6252 if installment acceleration.
- Buyer may request your SSN/TIN for reporting.
Texas-Specific Tax Notes
- No state income tax — you keep more than sellers in California or New York.
- Property tax implications: selling doesn't affect underlying land taxes.
- Franchise tax irrelevant for individuals.
Real-World Tax Examples (Simplified)
- Seller A: $150K note, $80K basis, sells for $120K → $40K gain → ~$6-8K federal tax.
- Seller B: Partial sale of $60K payments → lower immediate gain.
Net: most sellers find taxes manageable compared to holding risk.
Planning Tips for 2026
- Consult tax pro before accepting offer.
- Model scenarios (full vs partial).
- Consider timeline for year-end planning.
- Keep good records — basis documentation is crucial.
Related: Avoid common tax mistakes.
Frequently Asked Questions
Will I owe taxes immediately when I sell my note?
Yes — the gain is recognized in the year of sale, even if on installment method previously.
Is the entire sale price taxable?
No — only the gain (sale price minus basis). Interest already received was taxed earlier.
Can I defer taxes with a 1031 exchange?
Generally no for notes alone, though complex structures exist. Consult a specialist.
Does Texas charge state tax on the sale?
No — Texas has no personal income tax.
What if I sell at a loss?
You may deduct the capital loss against other gains.
Do partial sales reduce taxes?
Yes — only the portion sold triggers gain acceleration.
Should I worry about depreciation recapture?
If the underlying property was depreciated (rare for raw land), yes — but most land notes have no recapture.
Taxes shouldn't stop you from selling if it's right for your situation. Get your no-obligation quote today — call Sandy Henderson at (210) 828-3573 or submit your note details. We're happy to discuss timing around your tax planning.