The Section 453A Interest Charge on Installment Sales Over $5 Million.

A machine shop owner sells the company for $12,000,000. The buyer pays $4,000,000 at closing and signs a note for the other $8,000,000, payable over five years. She reports the sale on the installment method because she wants the gain spread across those years instead of stacked into one. Then her return comes back with a line she has never seen, on Schedule 2, called interest on deferred tax. Nobody underpaid anything and nothing was filed late. She owes the IRS interest for collecting her own purchase price on a schedule.

Two tests, both in §453A(b). The sales price of the property has to exceed $150,000. And the face amount of all installment obligations that arose during the year and are still outstanding at the close of that year has to exceed $5,000,000.

The second test is the one people misread. It is not per sale and it is not a lifetime cap. It is a per taxpayer, per year test that aggregates every qualifying note you took back that year. Two separate $4,000,000 sales in the same year put you over the line. The same two sales closing in different years do not.

Section 453A(b)(3) carves out property used or produced in the trade or business of farming and personal use property under §1275(b)(3). Everything else a nondealer sells on a note is in scope: private company stock, a commercial building, the assets of an operating business. Publicly traded stock never gets here, because §453(k)(2) bars the installment method for it outright and treats every payment as received in the year of sale.

Section 453A(c)(2) sets the annual charge as the applicable percentage of the deferred tax liability, multiplied by the underpayment rate in effect under §6621(a)(2) for the month with or within which the tax year ends. For a calendar year seller, that is December's rate.

The deferred tax liability in §453A(c)(3) is the gain not yet recognized at the close of the year (the unpaid principal times your gross profit percentage, which is total gain divided by contract price), times the maximum rate in effect under §1 or §11. Where the gain is long-term capital gain, the statute uses the maximum rate on net capital gain under §1(h), which is 20% for 2026. The 3.8% net investment income tax comes out of §1411, not section 1, so it stays out of this computation even though it applies to the gain itself as you recognize it.

The applicable percentage in §453A(c)(4) is the part of the note above $5,000,000 divided by the whole note, measured at the close of the year the note arose. Then it is fixed. Collect the note down to $2,000,000 in year four and the percentage does not follow it down. The deferred tax liability does shrink as the gain gets recognized, so the annual charge falls, but the fraction never moves.

The rate does move. The IRS held the underpayment rate at 7% for the first quarter of 2026, cut it to 6% for the second under Rev. Rul. 2026-5, and put it back to 7% for the third under Rev. Rul. 2026-10. Only December's rate matters on a calendar year return, and that one gets published in the fall.

Section 453A(d) is the provision that actually hurts. Pledge the installment obligation as security for a loan and the net proceeds of that loan count as a payment received on the note, on the later of the date the debt becomes secured or the date the money reaches you. The whole point of the seller note was to spread the gain. A line of credit collateralized by it accelerates the gain instead, with no cash coming from the buyer to pay the tax.

Three smaller ones. There is no proration in the year of sale, so a note signed December 20 draws the same full year charge as one signed in January, which makes a January closing worth real money. Depreciation recapture is not deferred at all: §453(i) pulls §1245 and §1250 recapture into income in the year of sale whether the buyer has paid you or not. And when the seller is a partnership, the charge does not stop at the entity, it lands on Schedule K-1 (Form 1065) in box 20 with code P, and each partner reports a share.

Mechanically, each note goes on Form 6252 every year it is outstanding, and the charge itself goes on Schedule 2, line 15. For an individual I would not plan on deducting it. Section 453A(c)(5) treats the amount as interest, but interest on a personal income tax liability is nondeductible personal interest under §163(h). A C corporation seller generally does get the deduction, since the personal interest rules do not reach it.

Run the number before you decide anything. On the $8,000,000 note above, the charge totals $100,800 over five years, which is 1.26% of the note. Set against not paying 20% federal tax on $6,400,000 of gain in a single year, that is usually a price worth paying. Not always. If the gain sits in the 20% bracket either way and your state has no rate spread to work with, the deferral is buying time value of money and not much else.

Four moves, roughly in order of how often they work. Stage the transaction so the notes arising in any one year stay at or under $5,000,000, which drives the applicable percentage to zero. Push a December closing into January and buy a full year. Elect out of the installment method entirely under §453(d), which has to be done by the due date of the return for the year of sale including extensions, and which Treas. Reg. §15a.453-1(d)(4) makes revocable only with IRS consent. Or get the deferral somewhere §453A does not reach, the way an ESOP sale or §1202 stock does, where the benefit is exclusion or rollover rather than an outstanding note.