670 / How is interest on the unpaid balance of an installment obligation treated?
All interest received by the taxpayer is ordinary income.1 In some cases, depending on the property and amount involved, the interest (or imputed interest) to be paid over the period of the loan must be reported as "original issue discount" accruing in daily portions. In other cases the interest is allocated among the payments and that much of each payment is treated as interest includable and deductible according to the accounting method of the seller and buyer, respectively.
Imputed interest rules also apply to installment sales. In general, if the sales price of the property exceeds $3,000 and any payment is deferred for more than one year, interest must be charged on payments due more than six months following the sale at a rate that is equal to 100 percent of the "applicable federal rate," compounded semiannually. If not, interest will be imputed at that rate.2 The applicable federal rate (see Q 676) is lowest of the AFRs in effect for any month in the three-month period ending with the first calendar month in which there is a binding written contract for sale.3
However, the following are exceptions to this general rule:
(1)if the interest charged is less than 100 percent of the AFR, a rate of no greater than 9 percent, compounded semiannually, will be imputed in the case of sales of property (other than new IRC Section 38 property) if the stated principal amount of the debt instrument does not exceed $7,462,600 ($7,296,700 in 2025, $7,098,600 in 2024, $6,734,800 in 2023, $6,289,500 in 2022, $6,099,500 in 2021, $6,039,100 in 2020, or $5,944,600 in 2019).4
(2)if the rate charged is less than 100 percent of the AFR, a rate of no greater than 6 percent, compounded semiannually, is imputed on aggregate sales of land during a calendar year between an individual and a family member (i.e., brothers, sisters, spouse, ancestors, and lineal descendants) to the extent the aggregate sales do not exceed $500,000 (the general rule of 100 percent of the AFR, compounded semiannually, applies to the excess);5 and
(3)a rate of 110 percent of the AFR, compounded semiannually, applies to sales or exchanges of property if, pursuant to a plan, the transferor or any related person leases a portion of the property after the sale or exchange back to the seller ("sale-leaseback" transactions).6
1. Treas. Reg. § 1.483-1.
2. IRC § 483.
3. IRC § 1274(d)(2)(B).
4. IRC § 1274A, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40, Rev. Proc. 2025-32.
5. IRC § 483(e)(3).
6. IRC § 1274(e).