Unstated Interest and Original Issue Discount (OID): Installment Sale Taxes (2025 IRS Guide)

This guide covers “Unstated Interest and Original Issue Discount (OID)” 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

The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. The following topics are discussed.

• Electing out of the installment method.

• Payments received or considered received.

• Escrow account.

• Depreciation recapture income.

• Sale to a related person.

• Like-kind exchange.

• Contingent payment sale.

• Single sale of several assets.

• Sale of a business.

• Unstated interest and OID.

• Disposition of an installment obligation.

• Repossession.

• Interest on deferred tax.

Unstated Interest and Original Issue Discount (OID)

An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Interest provided in the contract is called stated interest.

If an installment sale contract doesn’t provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. If section 483 applies to the contract, this interest is called unstated interest. If section 1274 applies to the contract, this interest is called OID.

An installment sale contract doesn’t provide for adequate stated interest if the stated interest rate is lower than the test rate. See Test rate of interest, later.

Treatment of unstated interest and OID.

Generally, if a buyer gives a debt in consideration for personal-use property, the unstated interest rules under section 483 and the OID rules under section 1274 don’t apply to the buyer. As a result, the buyer can’t deduct the unstated interest or OID. The seller must report the unstated interest or OID as income.

Personal-use property is any property in which substantially all of its use by the buyer isn’t in connection with a trade or business or an investment activity.

If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules.

Rules for the seller.

If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even if stated interest isn’t called for in the sales agreement. If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest or OID.

Include any unstated interest in income based on your regular method of accounting. Include any OID in income over the term of the contract.

The OID includible in income each year is based on the constant yield method described in section 1272. (In some cases, the OID on an installment sale contract may also include all or part of the stated interest, especially if the stated interest isn’t paid at least annually.)

If you don’t use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Reduce the selling price by any stated principal treated as interest to determine the gain.

Report unstated interest or OID on your tax return, in addition to stated interest (without double-counting any stated interest treated as OID).

Rules for the buyer.

Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer’s basis in the property and increases the buyer’s interest expense. These rules don’t apply to personal-use property (for example, property not used in a trade or business).

Adequate stated interest.

An installment sale contract generally provides for adequate stated interest if the contract’s stated principal amount is less than or equal to the sum of the present values of all principal and interest payments called for under the contract. The present value of a payment is determined based on the test rate of interest, defined next. (If section 483 applies to the contract, payments due within 6 months after the sale are taken into account at face value.) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest.

Test rate of interest.

The test rate of interest for a contract is the 3-month rate. The 3-month rate is the lower of the following applicable federal rates (AFRs).

• The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there’s a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed.

• The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs.

Applicable federal rate (AFR).

The AFR depends on the month the binding contract for the sale or exchange of property is made or the month of the sale or exchange and the term of the instrument. For an installment obligation, the term of the instrument is its weighted average maturity, as defined in Regulations section 1.1273-1(e)(3). The AFR for each term is shown below.

• For a term of 3 years or less, the AFR is the federal short-term rate.

• For a term of over 3 years, but not over 9 years, the AFR is the federal mid-term rate.

• For a term of over 9 years, the AFR is the federal long-term rate.

.The AFRs are published monthly in the Internal Revenue Bulletin (IRB). You can get this information at IRS.gov/ApplicableFederalRates..

Seller-financed sales.

For sales or exchanges of property (other than new section 38 property, which includes most tangible personal property subject to depreciation) involving seller financing of $7,296,700 or less, the test rate of interest can’t be more than 9%, compounded semiannually.

For information on new section 38 property, see section 48(b) as in effect before the enactment of Public Law 101-508.

Certain land transfers between related persons.

In the case of certain land transfers between related persons (described later), the test rate is no more than 6%, compounded semiannually.

Internal Revenue Code sections 1274 and 483.

If an installment sale contract doesn’t provide for adequate stated interest, generally either section 1274 or section 483 will apply to the contract. These sections recharacterize part of the stated principal amount as interest. Whether either of these sections applies to a particular installment sale contract depends on several factors, including the total selling price and the type of property sold.

Determining whether section 1274 or section 483 applies.

For purposes of determining whether section 1274 or section 483 applies to an installment sale contract, all sales or exchanges that are part of the same transaction (or related transactions) are treated as a single sale or exchange and all contracts arising from the same transaction (or a series of related transactions) are treated as a single contract. Also, the total consideration due under an installment sale contract is determined at the time of the sale or exchange. Any payment (other than a debt instrument) is taken into account at its FMV.

Section 1274

Section 1274 applies to a debt instrument issued for the sale or exchange of property if any payment under the instrument is due more than 6 months after the date of the sale or exchange and the instrument doesn’t provide for adequate stated interest. Section 1274, however, doesn’t apply to an installment sale contract that’s a cash method debt instrument (defined next) or that arises from the following transactions.

• A sale or exchange for which the total payments are $250,000 or less.

• The sale or exchange of an individual’s main home.

• The sale or exchange of a farm for $1 million or less by an individual, an estate, a testamentary trust, a small business corporation (defined in section 1244(c)(3)), or a domestic partnership that meets requirements similar to those of section 1244(c)(3).

• Certain land transfers between related persons (described later).

Cash method debt instrument.

This is any debt instrument given as payment for the sale or exchange of property (other than new section 38 property) with a stated principal of $5,211,900 (adjusted annually for inflation under section 1274A) or less if the following items apply.

1. The lender (holder) doesn’t use an accrual method of accounting and isn’t a dealer in the type of property sold or exchanged.

2. Both the borrower (issuer) and the lender jointly elect to account for interest under the cash method of accounting.

3. Section 1274 would apply except for the election in (2) above.

Land transfers between related persons.

The section 483 rules (discussed next) apply to debt instruments issued in a land sale between related persons to the extent the sum of the following amounts doesn’t exceed $500,000.

• The stated principal of the debt instrument issued in the sale or exchange.

• The total stated principal of any other debt instruments for prior land sales between these individuals during the calendar year.

The section 1274 rules, if otherwise applicable, apply to debt instruments issued in a sale of land to the extent the stated principal amount exceeds $500,000, or if any party to the sale is a nonresident alien.

Related persons include an individual and the members of the individual’s family and their spouses. Members of an individual’s family include the individual’s spouse, brothers and sisters (whole or half), ancestors, and lineal descendants. Membership in the individual’s family can be the result of a legal adoption.

Section 483

Section 483 generally applies to an installment sale contract that doesn’t provide for adequate stated interest and isn’t covered by section 1274. Section 483, however, generally doesn’t apply to an installment sale contract that arises from the following transactions.

• A sale or exchange for which no payments are due more than 1 year after the date of the sale or exchange.

• A sale or exchange for $3,000 or less.

Exceptions to Sections 1274 and 483

Sections 1274 and 483 don’t apply under the following circumstances.

• An assumption of a debt instrument in connection with a sale or exchange or the acquisition of property subject to a debt instrument, unless the terms or conditions of the debt instrument are modified in a manner that would constitute a deemed exchange under Regulations section 1.1001-3.

• A debt instrument issued in connection with a sale or exchange of property if either the debt instrument or the property is publicly traded.

• A sale or exchange of all substantial rights to a patent, or an undivided interest in property that includes part or all substantial rights to a patent, if any amount is contingent on the productivity, use, or disposition of the property transferred. See chapter 2 of Pub. 544 for more information.

• An annuity contract issued in connection with a sale or exchange of property if the contract is described in section 1275(a)(1)(B) and Regulations section 1.1275-1(j).

• A transfer of property subject to section 1041 (relating to transfers of property between spouses or incident to divorce).

• A demand loan that is a below-market loan described in section 7872(c)(1) (for example, gift loans and corporation-shareholder loans).

• A below-market loan described in section 7872(c)(1) issued in connection with the sale or exchange of personal-use property. This rule applies only to the holder.

More information.

For information on figuring unstated interest and OID and other special rules, see sections 1274 and 483 and the related regulations. In the case of an installment sale contract that provides for contingent payments, see Regulations sections 1.1275-4(c) and 1.483-4.

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

• Publication 537 (2025), Installment Sales: Unstated Interest and Original Issue Discount (OID) — Internal Revenue Service; 2025 edition.

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.