With seller financing, the seller can spread out the [tag]capital-gains tax[/tag] over the number of years agreed upon in the contract. By spreading it out, the seller can avoid being placed in a higher tax bracket. For sellers who don’t own their homes outright or won’t be able to pay off their existing loans in such a transaction, carrying a [tag]second mortgage[/tag] is a less attractive option. They run the risk of losing their investment if the borrower defaults. With seller financing, the principal that a seller receives each year is considered capital-gain income and is taxed at a lower rate. The rest is considered interest income and taxed at ordinary rates.