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. Changes In Tax Legislation And Regulation
    Taxes

    Changes In Tax Legislation And Regulation

  2. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

  3. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  4. Surviving The IRS Audit
    Taxes

    Surviving The IRS Audit

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center