Seller Financing and Vendor Take-Back Mortgages: How They Work for Buyers and Sellers
How a vendor take-back or seller carry-back mortgage works on a hotel or apartment sale, the terms to negotiate, the risks for each side and the tax rules.
Updated & fact-checked Figures are linked to their sources at the end of the article.
In seller financing, the seller of a property lends part of the purchase price to the buyer. Instead of receiving the whole price in cash at closing, the seller receives a down payment, sometimes plus the proceeds of the buyer’s bank loan, and holds a mortgage on the property for the rest. The buyer pays the seller over time.
In Canada this is usually called a vendor take-back mortgage (VTB). In the U.S. the same arrangement is called a seller carry-back, owner financing or a purchase-money mortgage. It is common when a property is hard to finance in full: a hotel with uneven trading history, an apartment building that needs work, or a market where banks are lending less. This article explains how it works, what to negotiate and what each side risks.
How a typical deal is structured
On a commercial sale, seller financing usually fills a gap rather than replacing the bank. The buyer’s bank provides a first mortgage, the buyer puts in equity, and the seller takes a second mortgage for the difference.
| Source of funds | Amount | Share of price |
|---|---|---|
| Buyer’s cash | $1,000,000 | 20% |
| Bank first mortgage | $3,000,000 | 60% |
| Vendor take-back second mortgage | $1,000,000 | 20% |
| Purchase price | $5,000,000 | 100% |
In the example, the seller receives $4 million at closing and is owed $1 million by the buyer, secured by a mortgage that ranks behind the bank’s. The seller becomes a lender, with a lender’s rights and a lender’s risks.
Steps in a seller-financed sale
Agree on price and the financing terms together
The amount of the VTB, interest rate, payment schedule, term and any balloon payment are part of the offer, not an afterthought.
Check what the buyer’s bank will accept
A first-mortgage lender may set conditions on a second mortgage behind them, such as its size, payments and whether it can be enforced while their loan is outstanding.
Seller does due diligence on the buyer
Credit, experience running this kind of property, and the business plan.
Lawyers document and register the mortgage
The VTB is registered against title like any other mortgage, usually with a promissory note and, where appropriate, a personal guarantee.
Payments and the exit
The buyer pays the seller as agreed and usually refinances or sells to pay off the balance at the end of the term.
Terms to negotiate
- Amount and ranking. How much the seller lends, and whether the mortgage is first or second. A second mortgage is only as safe as the equity above the first.
- Interest rate and payments. Interest-only, amortizing, or deferred for a period while the buyer renovates.
- Term and balloon. If the term is shorter than the amortization, the balance falls due in one payment at the end. Set a term that gives the buyer a realistic chance to refinance.
- Security. Personal guarantees, a pledge of the shares of the buying company, and assignments of rents or hotel revenues.
- Covenants. Insurance, property tax, maintenance, reporting of financial statements, and restrictions on adding more debt.
- Prepayment and sale. Whether the buyer can pay early, and what happens if the buyer sells the property before the VTB is repaid.
- Default. What counts as default, notice periods, and how the seller can enforce.
Who gains and who carries the risk
Seller financing from each side
For the buyer
- Can close with less cash or a smaller bank loan.
- Terms can be shaped to the property, for example lower payments during a renovation.
- A seller willing to lend signals confidence in the property.
- Risk: a balloon payment that has to be refinanced on time.
- Risk: total borrowing can be high, leaving little equity if values fall.
For the seller
- A wider pool of buyers, and sometimes a higher price.
- Interest income on the amount lent.
- In both Canada and the U.S., tax on the gain can be spread over the years payments are received (see below).
- Risk: the buyer defaults and the seller has to enforce, possibly taking back a property in worse condition.
- Risk: as a second mortgage, the VTB ranks behind the bank and may recover little in a forced sale.
Tax treatment
This section is general information. Speak to a tax adviser about your own sale.
Canada. When part of the price is paid after the year of sale, the Income Tax Act lets the seller claim a capital gains reserve: a deduction for the part of the gain that relates to proceeds not yet received.[1] The reserve is limited so that at least one-fifth of the gain is taxed each year. As the Canada Revenue Agency puts it, the maximum period over which most reserves can be claimed is four years, so the whole gain is included in income over five years. Reserves are claimed on Form T2017, and some sellers, such as non-residents and people selling to a corporation they control, generally cannot claim one.[2]
United States. A sale in which at least one payment is received after the tax year of the sale is an installment sale, reported on Form 6252. Depreciation recapture income must be reported in the year of sale, whether or not any payment is received that year, and if the contract does not provide enough stated interest, part of the price is treated as interest anyway.[3]
How it compares with other options
A VTB is one of several ways to buy over time from the seller. In a land contract or lease option, the seller keeps title until the buyer has paid or exercises an option; in a VTB the buyer takes title at closing and the seller holds a mortgage. For financing when there is no willing seller-lender, see hard money and private loans and our overview of financing hard-to-finance property. Our guide to preparing a hotel or apartment building for sale covers the rest of the selling process.
Sources
- Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)), section 40: General rules (reserve under subparagraph 40(1)(a)(iii)) — Justice Laws Website, Government of Canada. Checked 2026-10-12.
- Capital Gains – 2025 (Guide T4037), Claiming a reserve — Canada Revenue Agency. Checked 2026-10-12.
- Publication 537 (2025), Installment Sales — Internal Revenue Service. Checked 2026-10-12.
