IRS Publication 537 — Installment Sales
This is the passage the answer relied on, shown in the document's own words. The highlighted text is the exact excerpt quoted — extracted verbatim by the citation system, so it cannot be fabricated.
Open official source at page 9 ↗
“Substantial restriction. If an escrow arrangement impo- ses a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. For an escrow ar- rangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a speci…”
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.
Excerpt shown from a longer document — use the official source button above to read the complete publication.