Reporting Interest On An Installment Sale

Michael Lodge

by Michael Lodge

Installment sales is always an interesting topic with clients when they have signed a contract and are receiving interest.  Some clients feel they don’t need to report the interest so education has to be given to those clients that are misinformed.  Let’s look at what you need to do when you have an installment sale and receiving interest.

Question: How do I report interest income on an installment sale?

Answer:

If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for adequate stated interest payable with the deferred payments. That interest is taxable as ordinary income in the same manner as any other interest income.

If an installment contract does not provide for adequate stated interest, the amount of interest to be reported for a taxable year will be determined under the provisions of the Code dealing with imputed interest or original issue discount. You can report interest income from an installment sale payment on Form 1040, U.S. Individual Income Tax Return. If there was no gain on the sale, you can also use Form 1040A, U.S. Individual Income Tax Return, or Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents:

  • If your taxable interest income is more than $1,500, be sure to include that income on Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends, and attach it to your return.
  • You cannot file Form 1040EZ if your interest income is more than $1,500.
  • You also cannot file Form 1040EZ if your interest income was received on a seller-financed mortgage. See General Instructions in Schedule B (Form 1040A or 1040) for more information.

You may receive a letter or similar document instead of a Form 1099-INT, Interest Income, reporting your interest income. You still need to report it in full on your tax return.

If you have further questions on this topic please send an email to:  tax@icontaxgroup.cm