Unstated Interest Paid

AAA

DEFINITION of 'Unstated Interest Paid'

The percentage of interest the U.S. Internal Revenue Service (IRS) assumes has been paid on an installment sale, regardless of whether the interest was actually paid, if the interest rate falls below a specified minimum. Unstated interest must be calculated when a contract does not call for enough stated interest (the interest that is provided in the agreement). When property is sold on an installment basis, federal tax code mandates that the applicable federal rate of interest be included in the contract.

INVESTOPEDIA EXPLAINS 'Unstated Interest Paid'

For instance, an installment sale is a sales method that allows for partial deferral of any capital gain to future tax years, where the buyer makes regular payments (installments) on an annual basis, and where the seller receives at least one payment after the tax year of the sale. When interest isn't charged, or if interest is charged but falls below the minimum required rate, part of the amount that would normally be treated as a principal payment towards, must be treated as interest. This sum is called unstated interest.

IRS Publication 537 "Installment Sales" specifies rules regarding unstated interest as it pertains to installment sales. Because interest income must be reported as ordinary income, the IRS uses unstated interest to prevent abuses of interest-related deductions and various other tax benefits. A taxpayer can elect out of the installment method by reporting the entire gain in the year of sale, even if he or she does not receive all the sale proceeds in that year.

RELATED TERMS
  1. Installment Debt

    A loan that is repaid by the borrower in regular installments. ...
  2. IRS Publication 551 - Basis Of ...

    A document published by the Internal Revenue Service (IRS) that ...
  3. Write-Off

    A reduction in the value of an asset or earnings by the amount ...
  4. Interest

    1. The charge for the privilege of borrowing money, typically ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. Loan

    The act of giving money, property or other material goods to ...
Related Articles
  1. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

  2. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  3. Surviving The IRS Audit
    Taxes

    Surviving The IRS Audit

  4. 3 Common Tax Questions Answered
    Taxes

    3 Common Tax Questions Answered

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center