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.  Interest on an installment sale can be reported on  Form 1040 (PDF), Form 1040A (PDF), or Form 1040EZ (PDF):

• If your taxable interest income is more than $1,500, be sure to show that income on Form 1040 Schedule B (PDF).
• You cannot file Form 1040EZ if your interest income is more than $1,500.

For additional information on interest income, refer to:
Tax Topic 403, Interest Received.

For additional information on installment sales, refer to:
Tax Topic 705, Installment Sales, or
Publication 537, Installment Sales.