• Home
• Federal Income Taxes
  • Timberland Acquisition
  • Structuring Ownership
  • Timberland Appraisal
  • Determine Your Basis
  • Record Keeping
  • Management & Operating Expenses
  • Reforestation Expenses
  • Cost-Share Payments
  • Depreciation
  • Casualty Losses
  • Timber Sales & Income
  • Conservation Easements
  • Christmas Trees
  • Exchanges
  • Form T
  • Electronic Filing
• State Tax Laws
• Estate Planning
• Publications
• Professional Research
• Tax Workshops/Education
• Tax Policy
• Links

Lump-Sum Sale Installment Interest

Payments received from an installment sale consist of three parts:

• Return of your investment (basis) in the property sold
• Gain on the sale
• Interest income

You must report interest as ordinary income!!

Stated Interest - Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. An installment sale contract generally provides that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Interest that is provided for in the contract is called stated interest.

Unstated Interest - If an installment sale contract with some or all of the payments due more than one year after the date of sale does not provide for interest, part of each payment due more than 6 months after the date of the sale may be treated as interest. The amount treated as interest is called unstated interest. Unstated interest reduces the stated selling price for the property and increases your interest income. It also reduces the buyer's basis in the property and increases the buyer's interest expense. Generally the unstated interest rules do not apply to a debt given in consideration for sale or exchange or personal-use property. Personal-use property is any property where substantially all of its use by the buyer is not in a trade or business or an investment activity.

Unstated interest rules apply to payments on the sale or exchange of property under a contract in which:

1. At least one payment is due more than a full year after the date of the sale.
2. Selling price under the contract is more than $3,000.
3. The sales contract provides either for no interest, or a rate less than the test rate of interest. The test rate of interest is the 3 month applicable federal rate. This rate for the applicable month can be determined by calling the IRS.

When the stated interest rate is lower than the applicable federal rate (AFR), unstated interest is the difference between interest figured at the federal rate and any interest figured at the rate specified in the contract. The applicable federal rate (AFR) depends on the month the binding contract for the sale or exchange of property is made and the term of the instrument. If the term is:

• 3 years or less, the AFR is the federal short-term rate.
• Over 3 years, but not over 9 years, the AFR is the federal mid-term rate.
• Over 9 years, the AFR is the federal long-term rate.

The applicable federal rates are published monthly in the Internal Revenue Bulletin, you can get this information by contacting the IRS.

Figuring Unstated Interest - Generally a debt instrument provides for adequate stated interest if it calls for interest at a rate no lower than the test rate of interest applicable to the debt instrument. The test rate of interest for a debt instrument is the 3-month rate. The 3-month rate is the lower of:

The lowest AFR in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially sets forth the terms under which the sale or exchange is ultimately consummated, or

The lowest AFR in effect during the 3-month period ending with the month in which the sale or exchange occurs.

For sales or exchanges of property involving seller financing of $3,723,800 or less, the test rate of interest cannot be more than 9% compounded semiannually.