Unstated Interest Paid

Filed Under:
Dictionary Says

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 Says

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.



comments powered by Disqus
Hot Definitions
  1. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  2. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  3. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  4. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  5. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  6. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Trading Center