IRS Publication 537 — Installment Sales
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“Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. These sales can’t be reported on the installment method. The buyer’s obligation is paid in full when the balance of the purchase price is deposited into the escrow account. When an…”
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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