IRS Publication 537 — Installment Sales
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“Y ou sell property for $100,000. The sales agreement calls for a down payment of $10,000 and pay- ment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the bal- ance of the purchase price plus interest. Y ou can’t report the sale on the installment method because the full pur- chase price is considered received in the year of sale. Y ou report the ent…”
You must report interest as ordinary income. 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’s not called interest in your agreement with the buyer. Interest provided in the agreement is called stated interest. If the agreement doesn’t provide for enough stated interest, there may be unstated interest or original issue discount (OID). You may have to include interest in income even in a year you receive no payment, depending on your regular method of accounting and whether the interest is unstated interest or OID. See Unstated Interest and Original Issue Discount (OID), later.
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