How does seller financing work in Utah?
Seller financing, also called a seller carry or owner financing, means you lend the buyer part of the price instead of a bank. A typical Utah structure has three documents:
- Purchase contract with a seller financing addendum setting the down payment, rate, term, and payment.
- Promissory note, the buyer's promise to pay you.
- Trust deed, recorded with the county, which secures the note with the property. If the buyer stops paying, the trustee can sell the property.
The buyer gets title at closing. You get a down payment, monthly payments with interest, and often a balloon payment when the buyer refinances or sells.
Under Utah Code § 57-1-21, the trustee on a trust deed must be a qualified party, such as a Utah attorney or a Utah title insurance company or agency with an office in the state, and only an attorney or title company trustee can run a nonjudicial sale. Before a trustee sale, a notice of default must be recorded and at least three months must pass before the notice of sale (§ 57-1-24).
Why would a seller carry the financing?
| Benefit | Why it matters |
|---|---|
| Spread out the tax | An installment sale lets you report gain as you are paid instead of all in the year of sale. |
| Interest income | You earn interest on your equity, secured by property you know. |
| More buyers | Buyers who cannot get a bank loan quickly, such as for raw land or a unique property, may pay more for terms. |
| Price | Terms are something you can trade for price in a negotiation. |
The trade-offs: you take the risk that the buyer stops paying, your money is tied up, and if you have to foreclose you get the property back, possibly in worse shape. That is why the down payment and the buyer's ability to pay matter most.
How is seller financing taxed?
An installment sale is any sale where you receive at least one payment after the year of the sale (IRS Topic 705). The installment method applies automatically unless you elect out. Each payment has three parts:
- Interest, taxed as ordinary income each year.
- Return of your basis, not taxed.
- Gain, taxed in the year you receive it, using your gross profit percentage.
Some rules to know:
- Gain from depreciation recapture that must be reported as ordinary income is reported in the year of sale, even if you have not been paid yet.
- Dealers, such as people who subdivide and sell lots as a business, generally cannot use the installment method for that property.
- If you sell your main home on an installment sale, you can still use the $250,000 / $500,000 home sale exclusion. See capital gains tax when selling a home in Utah.
- Utah taxes the gain and interest at its flat 4.45% rate for 2026 as you report them federally.
The minimum interest rate
Utah law lets the parties agree on any rate of interest (§ 15-1-1). Federal tax law is different: if your note does not carry adequate stated interest, the IRS recharacterizes part of the principal as interest, using the applicable federal rate (AFR). For October 2026, IRS Revenue Ruling 2026-19 lists annual AFRs of:
| Term of the note | October 2026 AFR (annual) |
|---|---|
| Short-term (3 years or less) | 4.25% |
| Mid-term (over 3, up to 9 years) | 4.61% |
| Long-term (over 9 years) | 5.22% |
The IRS publishes new rates every month, and the test rate is the lowest AFR in the three months ending with the month the contract is signed. Ask your CPA which rate applies to your deal.
What federal and Utah rules apply to seller financing a home?
If the buyer is a consumer buying a home to live in, federal mortgage rules can apply. Under Regulation Z (12 CFR 1026.36), a seller is not treated as a loan originator if it meets one of two exclusions:
| Three-property exclusion | One-property exclusion | |
|---|---|---|
| Who | Any person | A natural person, estate, or trust |
| How many | 3 or fewer properties in 12 months | 1 property in 12 months |
| Builder? | Did not build the home in the ordinary course of business | Same |
| Payments | Fully amortizing, so no balloon | No negative amortization; a balloon is not prohibited by this rule |
| Ability to repay | Seller determines in good faith the buyer can repay | Not listed |
| Rate | Fixed, or adjustable only after 5 or more years with reasonable caps | Same |
On the Utah side, the Residential Mortgage Practices and Licensing Act exempts a seller who takes a trust deed as security for the sale (§ 61-2c-105). Other consumer credit laws can still apply, so have a real estate attorney draft or review the documents for any owner-occupied sale.
Land and investment property sold to a business buyer are usually simpler, but still deserve attorney-drafted documents.
A seller carry example, with numbers
Here is a simplified illustration of an investment property or land sale:
| Sale price | $800,000 |
| Seller's adjusted basis | $300,000 |
| Gain (ignoring selling costs) | $500,000 |
| Gross profit percentage ($500,000 ÷ $800,000) | 62.5% |
| Down payment at closing (20%) | $160,000 |
| Note carried by seller | $640,000 at an assumed 6.5%, 30-year amortization, 5-year balloon |
| Monthly payment to seller | about $4,045 |
| Year 1 gain reported (62.5% of $160,000 down plus about $7,150 of principal) | about $104,500 |
| Year 1 interest income (ordinary income) | about $41,400 |
| Balloon due at year 5 | about $599,100 |
Instead of reporting $500,000 of gain in one year, the seller reports about $104,500 in year 1, a few thousand a year after that, and the rest when the balloon is paid, while earning interest the whole time.
Illustration only, with made-up numbers. Not tax advice. A 5-year balloon may not fit the federal rules if the buyer is buying a home to live in. See the table above.
How do you protect yourself as the lender?
- Get a real down payment. It is your cushion if values fall or you have to foreclose.
- Check the buyer: credit report, income, and references, with written consent.
- Use a title company to close, issue title insurance, and record the trust deed.
- Name a qualified trustee on the trust deed, such as a Utah title company or attorney.
- Require insurance and taxes to be paid, with you named on the insurance policy.
- Use a loan servicing company to collect payments and send year-end statements.
- Pay off your own mortgage first, or get your lender's written consent. Federal law lets lenders enforce due-on-sale clauses, so a "wrap" around your existing loan can be called due.
- Have a real estate attorney draft the note, trust deed, and addendum.
Seller financing is common with land. See selling land to a developer for how it fits with other deal structures.
Common questions
Is seller financing legal in Utah?
Yes. Utah law lets parties agree on any interest rate, and Utah's mortgage licensing act exempts a seller who takes a trust deed to secure the sale. If the buyer will live in the home, federal rules under Regulation Z can limit the loan terms.
What interest rate should I charge on seller financing?
Whatever you and the buyer agree to, but at least the IRS applicable federal rate to avoid imputed interest. For October 2026, the annual AFRs were 4.25% short-term, 4.61% mid-term, and 5.22% long-term.
How is seller financing taxed in Utah?
As an installment sale: interest is ordinary income each year, and gain is reported as you receive principal, using your gross profit percentage. Utah taxes both at its flat 4.45% rate for 2026.
What happens if the buyer stops paying?
The trustee on the trust deed can foreclose. In a nonjudicial sale, a notice of default must be recorded and at least three months must pass before the notice of sale. You may get the property back, and the tax rules for repossession are in IRS Publication 537.
Can I offer seller financing if I still have a mortgage?
Only with care. Most mortgages have a due-on-sale clause, and federal law lets the lender enforce it. Paying off your loan or getting the lender's written consent is the safe path.
Can I seller finance with a balloon payment?
For investment property and land, often yes. For a home the buyer will live in, a seller using the three-property exclusion must offer a fully amortizing loan, while a natural person, estate, or trust selling only one property in 12 months is not prohibited from a balloon by that exclusion.
Who can be the trustee on a Utah trust deed?
A qualified party under Utah Code § 57-1-21, such as an active member of the Utah State Bar or a licensed title insurance company or agency with a Utah office. Only those two can exercise the power of sale.
A seller carry is one of the most useful tools I know, especially for land and for owners who would rather earn interest than pay all the tax in one year. It also carries real risk if the down payment is thin or the paperwork is weak. I like to model a cash sale and a carry side by side, then bring in a real estate attorney and your CPA before anything is signed.
Thinking about carrying the financing?
Tell us about your property and your goals. Matt will lay out a cash sale and a seller carry side by side and reach out personally. No pressure and no obligation.
Thank you.
Matt has your details and will reach out personally. If it is easier, you can text him anytime at (385) 477-8138.
Sources
- IRS Topic No. 705, Installment sales
- IRS Publication 537, Installment Sales
- IRS Revenue Ruling 2026-19, applicable federal rates for October 2026
- 26 U.S. Code § 453, installment method
- 26 U.S. Code § 1274(d), applicable federal rate by term
- 12 CFR § 1026.36(a)(4) and (5), seller financer exclusions (Regulation Z)
- Utah Code § 15-1-1, interest rates
- Utah Code § 57-1-21, trustees of trust deeds
- Utah Code § 57-1-24, notice of default
- Utah Code § 61-2c-105, Residential Mortgage Practices and Licensing Act exemptions
- 12 U.S. Code § 1701j-3, due-on-sale clauses
- Utah Code § 59-10-104, individual income tax rate
Last updated October 2026. This guide is general education, not legal or tax advice. Sumsion Real Estate is a real estate brokerage, not a lender, law firm, or CPA firm. The example uses made-up numbers. Have a real estate attorney prepare seller financing documents, and confirm the tax with your CPA.
