J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.31 “Interest” Tax on Sales Over $150,000 Plus $5 Million Debt

If deferred payments from installment sales of over $150,000 exceed $5 million, an interest charge is imposed on the tax-deferred amount. The special tax applies to non-dealer sales of business or rental property (real estate or personal property) for over $150,000. Farm property and personal-use property, such as a residence, are exempt from the tax.

How to report interest tax.

The interest charge is an additional tax. The method of computing the interest tax is complicated; the rules are in Internal Revenue Code Section 453A. In general, you compute the ratio of the face amount of outstanding installment obligations in excess of $5 million to the face amount of all outstanding installment obligations. This ratio is multiplied by the year-end unrecognized gain on the obligation, your top tax rate (ordinary income or capital gain) for the year, and also by the IRS interest rate for the last month of the year.

The interest is not deductible. It is reported as an “Other tax” on Line 60 of Form 1040.

Dealer sale of time shares and residential lots.

The installment method can be used to report income from sales of certain time-share rights (generally time shares of up to six weeks per year) or residential lots if the seller elects to pay interest on the tax deferred under the installment method. The rules for computing the interest are in Code Section 453 (l) (3). The interest is reported as an “Other tax” on Line 60 of ...