Tax Consequences of Conditional Seller Note?

searcher profile

October 15, 2025

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

I'm looking at a deal that will have a heavy performance structure tied to a conditional seller note. Does anyone have guidance regarding the tax consequences to the Seller and the Buyer? From the Seller perspective, I presume that would be the timing and tax rate on sale proceeds. From the Buyer perspective, does this approach create income from debt forgiveness if the performance requirement is not met? Any guidance on this is appreciated!
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commentor profile
Reply by a professional
in Austin, TX, USA
A conditional seller note is treated as a contingent payment sale under IRC §453. For the Seller: gain is typically recognized as payments are received unless they elect out of installment treatment. Unpaid amounts (if performance isn’t met) may result in a capital loss or bad debt deduction. For the Buyer: interest may be deductible, but forgiven debt could trigger COD income unless structured as a purchase price adjustment. Proper drafting is key to avoid reclassification and ensure accurate tax basis alignment. I'll send you some more details.
commentor profile
Reply by a professional
from University of Alabama at Birmingham in Florida, USA
Hi Paula. The devil is in the details on this one. You'll want to have someone review whether the seller note is truly debt or a contingent purchase price obligation. That distinction drives the timing and characterization of potential income. It's best for your attorney to coordinate with CPA or tax counsel and walk through the specific language in the agreement.
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