TAX w/SELLER financing on Primary Residence

I trying to sell my [primary] personal residence with seller financing as a second mortgage. (assuming that I have lived in it for 2 out of the previous 5 years. BTW-the house is only 3 1/2 years old)

Sale price of the property = $349,900
Seller to pay $8500 in closing costs.
Seller will carry a 2nd for $75,000 @ 10.5% amortized for 360 months (interest only) with a 2 year balloon.
This will net us an additional $13,000 and bring in $656.25 a month for 2 years as cash flow from the loan (additional $16,406.25 net over 2 years)

how will this additional cash flow or net profit will be treated from a tax standpoint?

Assuming that the buyer will attain a loan for 80%LTV = the buyers loan will be $279,920.
This leaves me with $69,980. There will be $5020 premium for carrying the second. In essence the buyer will be paying $354,920 for the house with a sales contract for $349,900. The 2nd mtg will be for $75,000 (69980+5020).

Essentially you are getting $346,420 ($349,900 + 5020 - $8500) for your house. If your cost basis is $96420 or higher, then all of your sale profit can be excluded from capital gains under the Section 121 rules for the sale of your primary residence.

Assuming that all of your sale profit will be tax free, the interest you earn on your seller financing will be taxed as ordinary income on your federal and state income tax returns for the year in which it is received. The loan principal will be tax free when received. There is an IRS publication that you can download from the IRS website that explains how to report an Installment Sale on your tax return.