Seller Financing for Real Estate Investors: 2026 Rules and Rates
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Quick Answer
Seller financing means the seller is the lender: the buyer pays part of the price at closing and the rest on a note secured by the property. For an investor buying a rental, most federal mortgage-lending rules do not apply, but the IRS minimum interest rule always does. Regulation Z's official interpretation says credit to buy a rental the owner will not live in “is deemed to be for business purposes” (comment 3(a)-4), and business credit is outside Regulation Z (12 CFR 1026.3(a)(1)), so the Dodd-Frank seller-financer conditions in 12 CFR 1026.36(a)(4) and (a)(5) (three properties a year, fully amortizing, ability to repay; or one property a year with no negative amortization) bind you only when the buyer is a consumer who will live there (our reading). The tax floor, as of October 12, 2026: a note under a contract signed in October 2026 must carry at least the lowest applicable federal rate of August-October 2026, which for a 4-to-9-year note is 4.35% with annual compounding or 4.26% monthly (Rev. Rul. 2026-13; 26 U.S.C. 1274(d)(2)). The October rates are 4.25% short-term, 4.61% mid-term and 5.22% long-term (Rev. Rul. 2026-19), up from 3.63%, 3.81% and 4.63% in January. The test rate cannot exceed 9% for notes up to $7,462,600 in 2026 (Rev. Proc. 2025-32). An existing bank mortgage on the property can be called on a sale (12 U.S.C. 1701j-3), and a buyer who wants a Fannie Mae cash-out loan to pay off the seller must wait until the seller note is 12 months old (Selling Guide B2-1.3-03).
Key Takeaways
- Investor to investor, seller financing is usually business credit: Regulation Z deems credit to acquire a non-owner-occupied rental, of any number of units, to be for business purposes (comment 3(a)-4), and credit to an LLC buyer is exempt outright (12 CFR 1026.3(a)(2)). Our reading: the Dodd-Frank seller-financer tests then do not decide anything.
- Selling to someone who will live there changes it: the three-property exclusion requires a fully amortizing note and a good-faith ability-to-repay check (12 CFR 1026.36(a)(4)); the one-property exclusion is only for a natural person, estate or trust (1026.36(a)(5)). More than 5 dwelling-secured consumer loans in a year makes you a creditor under 12 CFR 1026.2(a)(17)(v).
- IRS minimum rate: the lowest AFR of the 3 months ending with the contract month. For an October 2026 contract that is August's rates: 4.10% short-term, 4.35% mid-term, 4.92% long-term (annual compounding).
- AFRs rose all year: mid-term from 3.81% in January to 4.61% in October 2026, 0.80 points (our arithmetic from ten revenue rulings).
- Seller tax: the gain is spread over the payments (26 U.S.C. 453), but recapture income is taxed in the year of sale (453(i)), and interest on the deferred tax applies when a year's notes from sales over $150,000 exceed $5,000,000 at year end (453A).
- Exit: Fannie Mae will not do a cash-out refinance that pays off a first mortgage younger than 12 months, measured note date to note date, and never one that pays off an installment land contract (B2-1.3-03, December 10, 2025).
CSV · 181 rows
Seller financing for investors: IRS applicable federal rates January-October 2026 and the federal rules, with citations
181 rows: 120 applicable federal rates from Rev. Rul. 2026-2, 2026-3, 2026-6, 2026-7, 2026-9, 2026-11, 2026-12, 2026-13, 2026-17 and 2026-19 (short-, mid- and long-term; annual, semiannual, quarterly and monthly compounding); the October 2026 ruling reference; and 60 rules and thresholds with their citation and URL: 26 U.S.C. 453, 453A, 483, 1274 and 1274A, Rev. Proc. 2025-32, 12 CFR 1026.2, 1026.3 and 1026.36 with the official interpretation, 15 U.S.C. 1602, 12 U.S.C. 5102 and 1701j-3, 12 CFR 1008.103 and its appendix A, IRS Publication 537, Form 6252, the Form 1098 and Schedule A and B instructions, and Fannie Mae Selling Guide B2-1.3-02 and B2-1.3-03.
Is the seller a lender? Four federal tests an investor deal usually passes
The first question in any seller-financed sale is whether federal mortgage law treats the seller as a lender, with the disclosures, ability-to-repay rules and licensing that come with it. For a rental sold to an investor, four texts answer it, and in most investor deals they all point the same way (our reading of each; this is not legal advice).
Test 1: is it consumer credit at all? Regulation Z does not apply to “An extension of credit primarily for a business, commercial or agricultural purpose” (12 CFR 1026.3(a)(1)) or to credit to anyone other than a natural person (1026.3(a)(2)), so a note from an LLC buyer is out on the second ground alone. For an individual buyer, the official interpretation settles rentals: “Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes.” Its own example is “a single-family house that will be rented to another person to live in.” The rule breaks if the owner will occupy the property for more than 14 days in the coming year (comment 3(a)-4). If the buyer will live in one unit, credit to acquire it is deemed business only if the building has more than 2 units (comment 3(a)-5); a house-hack duplex is judged on the facts.
Test 2: is the seller a “creditor”? Even for consumer credit, Regulation Z's creditor definition counts a person who extended dwelling-secured consumer credit more than 5 times in the preceding calendar year, or more than once in 12 months if the loan is a high-cost mortgage (12 CFR 1026.2(a)(17)(v)).
Test 3: the Dodd-Frank seller-financer exclusions. These decide whether a seller is a “loan originator” under 12 CFR 1026.36. They matter only when the buyer is a consumer, and they differ more than most summaries say:
| Condition | Three-property exclusion, 12 CFR 1026.36(a)(4) | One-property exclusion, 12 CFR 1026.36(a)(5) |
|---|---|---|
| Who can use it | Any person, including an LLC or corporation | Only a natural person, estate or trust |
| Sales financed in any 12 months | 3 or fewer properties, each owned by the seller and securing the note | Only 1 property |
| Built the house? | Must not have built it, or acted as contractor, in the ordinary course of business | Same |
| Repayment | Fully amortizing (no balloon) | No negative amortization; the text does not bar a balloon (our reading) |
| Ability to repay | Good-faith determination required; the home's value is not evidence of it (comment 36(a)(4)-1) | Not in the text |
| Rate | Fixed, or adjustable after 5+ years with reasonable caps, on an index such as Treasuries or SOFR | Same |
| Safe-harbor caps | 2 points a year, 6 points lifetime (comment 36(a)(4)-2) | Same, by cross-reference (comment 36(a)(5)-1) |
The statute behind the three-property rule, 15 U.S.C. 1602(dd)(2)(E), goes one step further than the regulation's wording: the seller “determines in good faith and documents” the buyer's ability to repay. Keep the file.
Test 4: the SAFE Act. Mortgage loan originator licensing covers a “residential mortgage loan,” which 12 U.S.C. 5102(9) defines as a loan “primarily for personal, family, or household use” secured by a dwelling. A note on an investor's rental does not fit that definition (our reading). For consumer loans, Regulation H reaches only an individual who acts “in a commercial context and habitually or repeatedly” (12 CFR 1008.103(b)), and its appendix A lists, as an example of activity that needs no license, a seller who finances the sale of a dwelling it owns where the terms are negotiated exclusively by a third-party licensed loan originator.
What federal law leaves to the states. State usury limits, state mortgage-lending licences, and the special rules many states impose on contracts for deed and land contracts are not displaced by any of the above. We cover those state by state in contract for deed and land contract laws by state; check your state's statute before setting the rate.
The minimum interest rate in October 2026, from the IRS's own tables
Federal tax law, not lending law, sets the floor on a seller note's interest rate. If the stated rate is lower, the IRS treats part of the price as interest: the seller “must treat part of the installment sale price as interest, even if stated interest isn’t called for in the sales agreement” (IRS Publication 537, 2025). That converts capital gain into ordinary interest income for the seller and lowers the buyer's cost basis (our reading of sections 483 and 1274).
The floor is the applicable federal rate (AFR) for the note's term: short-term for 3 years or less, mid-term for over 3 and up to 9 years, long-term over 9 years (26 U.S.C. 1274(d)(1)). For a sale, the statute uses “the lowest of the applicable Federal rates in effect for any month in the 3-calendar-month period ending with the 1st calendar month in which there is a binding contract in writing for such sale or exchange” (1274(d)(2)). Publication 537 adds that the lowest AFR is taken for the appropriate compounding period, so a note paid monthly is compared with the monthly column (our reading). For an installment note the term is its weighted average maturity, so a 30-year-amortizing note with a 5-year balloon falls in the mid-term band (our reading of Pub. 537 and Treas. Reg. 1.1273-1(e)(3)).
| Month (revenue ruling) | Short-term, annual | Mid-term, annual | Mid-term, monthly | Long-term, annual |
|---|---|---|---|---|
| January 2026 (Rev. Rul. 2026-2) | 3.63% | 3.81% | 3.74% | 4.63% |
| February 2026 (Rev. Rul. 2026-3) | 3.56% | 3.86% | 3.79% | 4.70% |
| March 2026 (Rev. Rul. 2026-6) | 3.59% | 3.93% | 3.86% | 4.72% |
| April 2026 (Rev. Rul. 2026-7) | 3.59% | 3.82% | 3.75% | 4.62% |
| May 2026 (Rev. Rul. 2026-9) | 3.82% | 4.08% | 4.01% | 4.83% |
| June 2026 (Rev. Rul. 2026-11) | 3.85% | 4.13% | 4.06% | 4.87% |
| July 2026 (Rev. Rul. 2026-12) | 4.00% | 4.35% | 4.26% | 4.98% |
| August 2026 (Rev. Rul. 2026-13) | 4.10% | 4.35% | 4.26% | 4.92% |
| September 2026 (Rev. Rul. 2026-17) | 4.18% | 4.49% | 4.40% | 5.12% |
| October 2026 (Rev. Rul. 2026-19) | 4.25% | 4.61% | 4.52% | 5.22% |
Three things the table shows. The rates rose through the year: mid-term by 0.80 points from January to October, short-term by 0.62 and long-term by 0.59 (our arithmetic). Because rates rose, the 3-month look-back helps: a contract signed in October 2026 can use August's lower figures, and a contract signed in November 2026 will be able to use the lowest of September, October and November. And all of these sit far below the statutory cap, which for 2026 limits the test rate to 9%, compounded semiannually, on notes with stated principal up to $7,462,600 (26 U.S.C. 1274A(a); Rev. Proc. 2025-32, section 4.40; Publication 537 for 2025 still prints the 2025 figure of $7,296,700).
A worked example (our arithmetic). An investor sells a rental for $400,000 with $80,000 down and a $320,000 note, monthly payments on a 30-year schedule and a balloon after 5 years, under a contract signed in October 2026. The lowest mid-term monthly AFR for August-October is 4.26%. At that rate the payment is $1,576.08 a month and the balloon at month 60 is $290,630.07. Any rate the parties agree above 4.26% clears the test; a stated rate below it shifts part of the $320,000 into interest for tax purposes. The rate the parties actually agree is a market and state-law question; the AFR is only the floor.
Special cases, each with its source:
| Situation | Rule | Source |
|---|---|---|
| Total payments of $250,000 or less | Section 1274 does not apply; section 483 does, with the same test rate | 26 U.S.C. 1274(c)(3)(C) |
| Note up to $7,462,600 (2026) | Test rate capped at 9%, compounded semiannually | 26 U.S.C. 1274A(a); Rev. Proc. 2025-32 |
| Note up to $5,330,500 (2026), cash-method seller, not a dealer | Buyer and seller may jointly elect to report interest when paid instead of as original issue discount | 26 U.S.C. 1274A(c); Rev. Proc. 2025-32 |
| Land sold between related individuals | Test rate capped at 6% on up to $500,000 of sales a year between the same individuals | 26 U.S.C. 483(e) |
| Sale of your own main home | Excluded from section 1274 (section 483 applies); not available for a rental | 26 U.S.C. 1274(c)(3)(B) |
| Price cannot exceed $3,000 | Section 483 does not apply | 26 U.S.C. 483(d)(2) |
Selling a property that still has a mortgage: due-on-sale and the wrap
Many seller-financed sales are “wraps”: the seller keeps paying an existing bank loan and the buyer pays the seller a larger note. Federal law lets the bank stop it. A due-on-sale clause is one that lets the lender call the loan “if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender's prior written consent” (12 U.S.C. 1701j-3(a)(1)), and the statute lets lenders enforce such clauses notwithstanding state law (1701j-3(b)(1)).
The exemptions in 1701j-3(d) apply only to residential property with fewer than five dwelling units, and a sale to a buyer is not on the list: they cover transfers such as a junior lien that “does not relate to a transfer of rights of occupancy in the property,” a lease of 3 years or less with no purchase option, and transfers on death, divorce or into a living trust. A lease-option or a deed to an investor buyer falls outside them (our reading). Our page on DSCR loans in an LLC covers the narrower case of deeding your own rental into your own LLC.
The wrap also changes the seller's tax. When a buyer takes the property subject to a mortgage that exceeds the seller's basis, “The part of the mortgage greater than your basis is treated as a payment received in the year of sale” (Publication 537, 2025), so a heavily depreciated, heavily refinanced rental can produce taxable gain at closing even with little cash down (our reading).
How the seller is taxed: what spreads and what does not
The installment method is automatic for a sale where at least 1 payment arrives after the year of sale (26 U.S.C. 453(b)(1)), and the seller may elect out (453(d)). Our capital gains tax on real estate page walks through the gross-profit arithmetic; the points specific to a seller who is carrying paper on a rental are these.
| Rule | What it does to a rental seller | Source |
|---|---|---|
| Recapture income | Taxed in the year of sale even if no principal arrives that year | 26 U.S.C. 453(i)(1)(A) |
| Straight-line building | IRS example: no depreciation recapture income on a section 1250 building depreciated straight line; components depreciated faster (for example after a cost segregation study) are a different matter (our reading) | IRS Publication 537 (2025) |
| Sale to a related buyer | If the related buyer resells within 2 years, the seller is treated as paid at that time | 26 U.S.C. 453(e)(2)(A); Form 6252 Part III |
| Interest on the deferred tax | Applies to notes from sales over $150,000 when the face amount of such notes arising in the year and outstanding at year end exceeds $5,000,000 | 26 U.S.C. 453A(b) |
| Borrowing against the note | Loan proceeds secured by the note are treated as a payment received | 26 U.S.C. 453A(d)(1) |
| Mortgage above basis | Excess treated as a payment in the year of sale | IRS Publication 537 (2025) |
| Filing | Form 6252 for the year of sale and every later year until the final payment | Form 6252 (2025) |
The wording of 453(i) is short: “any recapture income shall be recognized in the year of the disposition.” For a residential rental depreciated straight line, that is often a small number, because the IRS's own example finds no recapture income on such a building (our reading of Publication 537). Sellers above the $5,000,000 line should read our deferred sales trust page, which works through the section 453A interest charge.
Paperwork both sides get wrong: Form 1098 and the SSN rule
Form 1098. A seller files Form 1098 only for mortgage interest of $600 or more received “in the course of your trade or business from an individual” (Instructions for Form 1098, revised December 2026). The instructions' own example: a real estate developer financing a home in its subdivision must file, while “a physician not engaged in any other business” who lends to the buyer of their home does not. Whether an individual who owns rentals is “in a trade or business” for this purpose is not answered by the instructions; ask a tax adviser.
The SSN exchange. When the buyer uses the property as a personal residence, the seller lists the interest on Schedule B with the buyer's name, address and SSN, and must give the buyer the seller's SSN; failing that, the seller “may have to pay a $50 penalty” (Instructions for Schedule B, 2025). The buyer reports the seller's details next to line 8b of Schedule A (Instructions for Schedule A, 2025). Neither rule is written for a buyer of a non-owner-occupied rental (our reading), but both sides should still swap taxpayer numbers so each can report the interest.
Getting out: refinancing a seller note
Most seller notes on rentals end with a balloon, and the buyer's plan is to refinance before it. Two Fannie Mae rules decide when a conventional lender can do that, and one of them catches many buyers.
The 12-month rule. For a cash-out refinance, “If an existing first mortgage is being paid off through the transaction, it must be at least 12 months old at the time of refinance, as measured by the note date of the existing loan to the note date of the new loan” (Selling Guide B2-1.3-03, version of December 10, 2025). A seller note in first position is an existing first mortgage, so a buyer who wants cash out cannot do it with a Fannie Mae loan until the seller note is a year old (our reading). At least one borrower must also have been on title for 6 months. Subordinate liens of any age can be paid off, which covers a seller second behind a bank first.
Land contracts are treated differently. A cash-out refinance cannot pay off an installment land contract at all, “regardless of the date the installment land contract was executed” (B2-1.3-03). A limited cash-out (rate-and-term) refinance can, if the contract was executed more than 12 months before the loan application (B2-1.3-02, version of October 8, 2025). If your deal is a contract for deed rather than a deed with a note, plan the exit around that difference.
DSCR and other business-purpose lenders publish their own, often shorter, seasoning rules; our cash-out refinance on investment property page lists what several of them print, and how to refinance a DSCR loan covers prepayment penalties. We looked for public data on how many seller-financed buyers refinance out and found none: HMDA reports the new loan but not what it paid off (our reading of the public HMDA fields), so any figure you see for this is a survey or a guess.
What a buyer or seller can do with this
- Decide which side of Test 1 the deal is on. A rental the buyer will not live in, or a buyer that is an LLC, keeps the note out of Regulation Z. A buyer who will move in brings in 12 CFR 1026.36(a)(4) or (a)(5) and possibly the ability-to-repay file.
- Date the contract with the rate in mind. Check the three AFRs ending with the month you sign; with rates rising in 2026, an earlier binding contract locks a lower floor. Write the compounding period into the note.
- Read the existing mortgage before agreeing to a wrap. If the deed of trust has a due-on-sale clause, a sale gives the lender the right to call it. Ask for consent in writing or pay it off.
- Seller: price the year-one tax. Recapture income and any mortgage above basis are taxed at closing, whatever the down payment.
- Buyer: set the balloon after the refinance window. A balloon earlier than 12 months plus underwriting time leaves no conventional cash-out exit.
The three lenders above make investor loans on rentals that a seller-financed buyer can use to pay off the seller note at or before the balloon; none of them offers seller financing, and none of their published terms says how it treats a payoff of a private note, so ask about seasoning from the seller note's date before you apply.
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When a rate, rule or filing behind this page changes: what changed, the one number that matters, and the source to check it yourself.
FAQ
Sources, read and saved on October 12, 2026: IRS Rev. Rul. 2026-2, 2026-3, 2026-6, 2026-7, 2026-9, 2026-11, 2026-12, 2026-13, 2026-17 and 2026-19 (applicable federal rates for January to October 2026, irs.gov/pub/irs-drop) and the IRS applicable federal rates index; Rev. Proc. 2025-32, section 4.40; 26 U.S.C. 453, 453A, 483, 1274 and 1274A, 12 U.S.C. 1701j-3 and 5102 and 15 U.S.C. 1602 (U.S. Code, 2024 edition, govinfo.gov); 12 CFR 1026.2, 1026.3 and 1026.36 and Supplement I to part 1026, and 12 CFR 1008.103 and appendix A to part 1008 (eCFR, current as of October 8, 2026); IRS Publication 537 (2025), Form 6252 (2025), Instructions for Form 1098 (revised December 2026) and the 2025 Instructions for Schedules A and B (Form 1040); Fannie Mae Selling Guide B2-1.3-02 (October 8, 2025) and B2-1.3-03 (December 10, 2025). The monthly payment, balloon and rate changes are our arithmetic. Interpretations marked “our reading” are ours. This is analysis of public documents, not investment, legal or tax advice.
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