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Interest on Deferred Tax — How to figure interest on deferred tax: Installment Sale Taxes (2025 IRS Guide)

This guide covers “Interest on Deferred Tax — How to figure interest on deferred tax” within installment sale taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 537 (2025), Installment Sales, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, you must pay interest on the deferred tax related to any obligation that arises during a tax year from the disposition of property under the installment method if both of the following apply.

  • The property had a sales price over $150,000. In determining the sales price, treat all sales that are part of the same transaction as a single sale.

  • The total balance of all nondealer installment obligations arising during, and outstanding at the close of, the tax year is more than $5 million.

Interest on Deferred Tax — How to figure interest on deferred tax

How to figure interest on deferred tax.

First, find the underpayment rate in effect for the month with or within which your tax year ends. The underpayment rate is published quarterly in the Internal Revenue Bulletin, available at IRS.gov/irb. Then compute the deferred tax liability. The deferred tax liability is equal to the balance of the unrecognized gain at the end of the tax year multiplied by your maximum tax rate (ordinary or capital gain, as appropriate) in effect for the tax year. Note, you will need to determine the gross profit percentage of the installment sale to calculate the amount of the gain that has not been recognized. Next you will need to compute the applicable percentage. The applicable percentage is the aggregate face amount of obligations outstanding as of the close of the tax year in excess of $5 million divided by the aggregate face amount of obligations outstanding as of the close of the tax year. To determine the interest on the deferred tax you owe, multiply your deferred tax liability by the applicable percentage by the underpayment rate.

Section 453A Example.

Below is an example of the computation. ABC, Inc., a calendar year taxpayer, sold intellectual property with a $0 basis to an unrelated party on November 15, 2022, for $15 million on the installment method (a payment is due after the year of sale). ABC, Inc., incurred $500,000 of expenses related to the sale. The installment sale contract requires the following payments.

  • 2022: $1 million.

  • 2023: $5 million.

  • 2024: $9 million—Note is paid off.

Computation Under Section 453A
Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B)
Interest on Deferred Tax Liability = Deferred Tax Liability (See Step 1 below) x Applicable Percentage (See Step 2 below) x Underpayment Rate (Step 3)
Step 1: 2022 Compute the Deferred Tax Liability
= The amount of gain with respect to an obligation which has not been recognized as of the close of such tax year x The maximum rate of tax for ordinary income or long-term capital gain, as applicable for such tax year
Form 6252, line 7, Selling price minus liabilities assumed 15,000,000
– Form 6252, line 21, Payments received in current year (1,000,000)
2022 Deferred Obligation 14,000,000
x Form 6252, line 19, Gross profit percentage
(($15,000,000 – $500,000)/$15,000,000) 96.6670%
The amount of gain that has not been recognized 13,533,380
x Maximum capital gains tax rate 21%
Deferred Tax Liability 2,842,010
Step 2: Compute the Applicable Percentage
The applicable percentage is computed in the year of sale and is used for all subsequent years.
= Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000 – $5,000,000 Excluded obligation limit per section 453A(b)(2)(B) & section 453A(c)(4)(A)
Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000
Form 6252, line 7, Selling price minus liabilities assumed 15,000,000
– Form 6252, line 21, Payments received in current year (1,000,000)
2022 Deferred Obligation 14,000,000
(14,000,000 – 5,000,000) = 64.2857%
14,000,000
Step 3: Determine the Underpayment Rate
The underpayment rate as of December 31, 2022, was 6%. The underpayment rate as of December 31, 2023 was 8%. The underpayment rate under section 453A(c)(2)(B) is the underpayment rate determined under section 6621(a)(2).
Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability
= Deferred Tax Liability x Applicable Percentage x Underpayment Rate
Deferred Tax Liability 2,842,010
x Applicable Percentage 64.2857%
x Underpayment Rate 6.00%
2022 453A additional tax $109,620
2023 Deferred Tax Liability calculation:
2022 Deferred Obligation 14,000,000
– 2023 Payment received (5,000,000)
2023 Deferred Obligation 9,000,000
x Gross Profit Percentage 96.6670%
The amount of gain that has not been recognized 8,700,030
x Maximum capital gains tax rate 21%
2023 Deferred Tax Liability 1,827,006
2023 Section 453A Calculation:
Deferred Tax Liability 1,827,006
x Applicable Percentage 64.2857%
x Underpayment Rate 8.00%
2023 Section 453A additional tax $93,960
2024 Section 453A Calculation: Note is paid off in full, so no deferred tax liability
Deferred Tax Liability 0
x Applicable Percentage 64.2857%
x Underpayment Rate N/A
2024 Section 453A additional tax $0
Computation Under Section 453A
Section 453A(c)(2) Section 453A(c)(3) Section 453A(c)(4) Section 453A(c)(2)(B)
Interest on Deferred Tax Liability = Deferred Tax Liability (Step 1 below) x Applicable Percentage (Step 2 below) x Underpayment Rate (Step 3)
Step 1: Compute the Deferred Tax Liability
Section 453A(c)(3)(A) Section 453A(c)(3)(8)
= The amount of gain with respect to an obligation which has not been recognized as of the close of such tax year x The maximum rate of tax for ordinary income or long-term capital gain, as applicable for such tax year
Step 2: Compute the Applicable Percentage
= Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000 – 5,000,000
Aggregate face amount of obligations arising in a tax year and outstanding as of the close of such tax year from dispositions with sales price > $150,000
Note: The Applicable Percentage is computed in the initial year the installment sale arises. It does not change as payments are made in subsequent years.
Step 3: Determine the Underpayment Rate
Step 4: Compute the Interest Due (Additional Tax) on the Deferred Tax Liability
= Deferred Tax Liability x Applicable Percentage x Underpayment Rate

For information on interest on dealer sales of timeshares and residential lots under the installment method, see section 453(l).

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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