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How do I report interest income on an installment sale?

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To report interest income on an installment sale, follow these steps:

Identify Interest Income: Interest income from an installment sale must be reported as ordinary income. This interest is generally not included in the down payment but may be part of each subsequent payment. The interest can be stated interest, unstated interest, or original issue discount (OID).
Determine the Type of Interest:
- Stated Interest: This is the interest explicitly provided in the agreement.
- Unstated Interest: If the agreement does not provide for adequate stated interest, part of the principal amount may be recharacterized as interest under section 483.
- Original Issue Discount (OID): If section 1274 applies, the interest is treated as OID.
Report Interest Income:
- Form 1040: Report the interest portion of each payment as ordinary income on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.
- Schedule B (Form 1040): If your taxable interest income exceeds $1,500, include it on Schedule B (Form 1040), Interest and Ordinary Dividends, and attach it to your return.
- Form 1040-NR: If you are a nonresident alien, report the interest on Schedule NEC (Form 1040NR), U.S. Nonresident Alien Income Tax Return.
Provide Buyer Information: If the buyer is using the property as a first or second home, report the buyer's name, address, and social security number on Schedule B (Form 1040). Failure to provide this information may result in a $50 penalty.
Use Form 6252: For reporting the installment sale itself, use Form 6252, Installment Sale Income, to report the sale and calculate the interest income.
Accounting Method: Depending on your regular method of accounting, you may need to include interest in income even in a year you receive no payment, especially if dealing with unstated interest or OID.