Title 26, Internal Revenue CodeRelease 119-110
§453A Special Rules for Nondealers
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter E — Accounting Periods and Methods of Accounting › PART II — METHODS OF ACCOUNTING › Subpart B — Taxable Year for Which Items of Gross Income Included › § 453A
Summary
Requires people who sell property under the installment method to pay interest on the tax they defer for certain big deals. The rule applies when the sales price is more than $150,000. Interest rules for a year only kick in if the installment contracts from that year are still outstanding at year-end and the face amount of those contracts still owed from that year is more than $5,000,000. Sales of personal-use items and most farm property are not covered. Timeshares and residential lots follow a separate rule for interest. The extra tax for a year is the “applicable percentage” of the deferred tax times the IRS underpayment rate for the month the year ends. Deferred tax means the gain you have not reported yet multiplied by the top tax rate that applies to you. The applicable percentage equals (the part of the total face amount over $5,000,000) divided by (the total face amount). If you use an installment contract as loan collateral, the loan proceeds are treated as if you received payment on the contract when the loan becomes secured or when you get the money, but only up to the unpaid contract price. The Treasury can make rules to deal with tricky situations, like contingent payments, short years, pass‑through entities, and schemes using related parties.
Full Legal Text
Title 26, §453A
Internal Revenue Code, Source: USLM XML via OLRC
(a)General rule
In the case of an installment obligation to which this section applies—
(1)interest shall be paid on the deferred tax liability with respect to such obligation in the manner provided under subsection (c), and
(2)the pledging rules under subsection (d) shall apply.
(b)Installment obligations to which section applies
(1)In general
This section shall apply to any obligation which arises from the disposition of any property under the installment method, but only if the sales price of such property exceeds $150,000.
(2)Special rule for interest payments
For purposes of subsection (a)(1), this section shall apply to an obligation described in paragraph (1) arising during a taxable year only if—
(A)such obligation is outstanding as of the close of such taxable year, and
(B)the face amount of all such obligations held by the taxpayer which arose during, and are outstanding as of the close of, such taxable year exceeds $5,000,000.
Except as provided in regulations, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as one person for purposes of this paragraph and subsection (c)(4).
(3)Exception for personal use and farm property
An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition—
(A)by an individual of personal use property (within the meaning of section 1275(b)(3)), or
(B)of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)).
(4)Special rule for timeshares and residential lots
An installment obligation shall not be treated as described in paragraph (1) if it arises from a disposition described in section 453(l)(2)(B), but the provisions of section 453(l)(3) (relating to interest payments on timeshares and residential lots) shall apply to such obligation.
(5)Sales price
For purposes of paragraph (1), all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
(c)Interest on deferred tax liability
(1)In general
If an obligation to which this section applies is outstanding as of the close of any taxable year, the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined in the manner provided under paragraph (2).
(2)Computation of interest
For purposes of paragraph (1), the interest for any taxable year shall be an amount equal to the product of— (A)
(B)the underpayment rate in effect under section 6621(a)(2) for the month with or within which the taxable year ends.
(3)Deferred tax liability
For purposes of this section, the term “deferred tax liability” means, with respect to any taxable year, the product of— (A)
For purposes of applying the preceding sentence with respect to so much of the gain which, when recognized, will be treated as long-term capital gain, the maximum rate on net capital gain under section 1(h) shall be taken into account.
(4)Applicable percentage
For purposes of this subsection, the term “applicable percentage” means, with respect to obligations arising in any taxable year, the percentage determined by dividing—
(A)the portion of the aggregate face amount of such obligations outstanding as of the close of such taxable year in excess of $5,000,000, by
(B)the aggregate face amount of such obligations outstanding as of the close of such taxable year.
(5)Treatment as interest
Any amount payable under this subsection shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during the taxable year.
(6)Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this subsection including regulations providing for the application of this subsection in the case of contingent payments, short taxable years, and pass-thru entities.
(d)Pledges, etc., of installment obligations
(1)In general
For purposes of section 453, if any indebtedness (hereinafter in this subsection referred to as “secured indebtedness”) is secured by an installment obligation to which this section applies, the net proceeds of the secured indebtedness shall be treated as a payment received on such installment obligation as of the later of— (A)
(B)the time the proceeds of such indebtedness are received by the taxpayer.
(2)Limitation based on total contract price
The amount treated as received under paragraph (1) by reason of any secured indebtedness shall not exceed the excess (if any) of— (A)
(B)any portion of the total contract price received under the contract before the later of the times referred to in subparagraph (A) or (B) of paragraph (1) (including amounts previously treated as received under paragraph (1) but not including amounts not taken into account by reason of paragraph (3)).
(3)Later payments treated as receipt of tax paid amounts
If any amount is treated as received under paragraph (1) with respect to any installment obligation, subsequent payments received on such obligation shall not be taken into account for purposes of section 453 to the extent that the aggregate of such subsequent payments does not exceed the aggregate amount treated as received under paragraph (1).
(4)Secured indebtedness
For purposes of this subsection indebtedness is secured by an installment obligation to the extent that payment of principal or interest on such indebtedness is directly secured (under the terms of the indebtedness or any underlying arrangements) by any interest in such installment obligation. A payment shall be treated as directly secured by an interest in an installment obligation to the extent an arrangement allows the taxpayer to satisfy all or a portion of the indebtedness with the installment obligation.
(e)Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations—
(1)disallowing the use of the installment method in whole or in part for transactions in which the rules of this section otherwise would be avoided through the use of related persons, pass-thru entities, or intermediaries, and
(2)providing that the sale of an interest in a partnership or other pass-thru entity will be treated as a sale of the proportionate share of the assets of the partnership or other entity.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Prior Provisions
Provisions similar to those comprising this section were contained in former section 453 of this title.
Amendments
2017—Subsec. (c)(3). Pub. L. 115–97 struck out “or 1201 (whichever is appropriate)” after “1(h)” in concluding provisions. 1999—Subsec. (d)(4). Pub. L. 106–170 inserted at end “A payment shall be treated as directly secured by an interest in an installment obligation to the extent an arrangement allows the taxpayer to satisfy all or a portion of the indebtedness with the installment obligation.” 1993—Subsec. (c)(3). Pub. L. 103–66 inserted at end “For purposes of applying the preceding sentence with respect to so much of the gain which, when recognized, will be treated as long-term capital gain, the maximum rate on net capital gain under section 1(h) or 1201 (whichever is appropriate) shall be taken into account.” 1989—Subsec. (b)(2)(B). Pub. L. 101–239, § 7821(a)(1), substituted “such obligations held by the taxpayer” for “obligations of the taxpayer described in paragraph (1)”. Subsec. (b)(3). Pub. L. 101–239, § 7815(g), substituted “Exception for personal use and farm property” for “Exception for farm property” in heading and amended text generally. Prior to amendment, text read as follows: “An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5).” Pub. L. 101–239, § 7812(c)(2), substituted “(5)).” for “(5).” Subsec. (c)(5), (6). Pub. L. 101–239, § 7821(a)(4)(B), added par. (5) and redesignated former par. (5) as (6). Subsec. (d)(1)(B). Pub. L. 101–239, § 7821(a)(3), substituted “the time the proceeds” for “the proceeds”. Subsec. (d)(2)(B). Pub. L. 101–239, § 7821(a)(2), substituted “the later of the times referred to in subparagraph (A) or (B) of paragraph (1)” for “such secured indebtedness was incurred”. 1988—Pub. L. 100–647, § 5076(b)(1), struck out “of real property” after “rules for nondealers” in section catchline. Subsec. (b)(1). Pub. L. 100–647, § 5076(a), amended par. (1) generally. Prior to amendment, par. (1) read as follows: “This section shall apply to any obligation which arises from the disposition of real property under the installment method which is property used in the taxpayer’s trade or business or property held for the production of rental income, but only if the sales price of such property exceeds $150,000.” Subsec. (b)(2). Pub. L. 100–647, § 2004(d)(7), inserted “and subsection (c)(4)” after “of this paragraph” in last sentence. Subsec. (b)(3). Pub. L. 100–647, § 2004(d)(8), substituted “farm property” for “personal use and farm property” in heading and amended text generally. Prior to amendment, text read as follows: “An installment obligation shall not be treated as described in paragraph (1) if it arises from the disposition— “(A) by an individual of personal use property (within the meaning of section 1275(b)(3)), or “(B) of any property used or produced in the trade or business of farming (within the meaning of section 2032A(e)(4) or (5)).” Subsec. (c). Pub. L. 100–647, § 1008(g)(2), substituted “453(k)” for “453(j)” in subsec. (c) as in effect on date before the date of enactment of Pub. L. 100–203 (Dec. 22, 1987). Subsec. (e). Pub. L. 100–647, § 2004(d)(2), added subsec. (e). 1987—Pub. L. 100–203 substituted “Special rules for nondealers of real property” for “Installment method for dealers in personal property” in section catchline and amended text generally, revising and restating as subsecs. (a) to (d) provisions of former subsecs. (a) to (c). 1986—Subsec. (a)(2). Pub. L. 99–514, § 812(b)(1), struck out last sentence which read as follows: “This paragraph shall not apply with respect to sales of personal property under a revolving credit type plan.” Subsec. (c). Pub. L. 99–514, § 812(b)(2), added subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date
of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title.
Effective Date
of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to sales or other dispositions occurring on or after Dec. 17, 1999, see section 536(c) of Pub. L. 106–170, set out as a note under section 453 of this title.
Effective Date
of 1993 AmendmentAmendment by Pub. L. 103–66 applicable to taxable years beginning after Dec. 31, 1992, see section 13201(c) of Pub. L. 103–66, set out as a note under section 1 of this title.
Effective Date
of 1989 AmendmentAmendment by section 7812(c)(2) and 7815(g) of Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. Amendment by section 7821(a)(1)–(3), (4)(B) of Pub. L. 101–239 effective as if included in the provision of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 7823 of Pub. L. 101–239, set out as a note under section 26 of this title.
Effective Date
of 1988 AmendmentAmendment by section 1008(g)(2) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 2004(d)(2), (7), (8) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title. Pub. L. 100–647, title V, § 5076(c), Nov. 10, 1988, 102 Stat. 3683, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by this section [amending this section] shall apply to sales after December 31, 1988. “(2) Binding contract, etc.—The
Amendments
made by this section shall not apply to any sale on or before
December 31, 1990, if—“(A) such sale is pursuant to a written binding contract in effect on
October 21, 1988, and at all times thereafter before such sale, “(B) such sale is pursuant to a letter of intent in effect on
October 21, 1988, or “(C) there is a board of directors or shareholder approval for such sale on or before
October 21, 1988.”
Effective Date
of 1987 AmendmentAmendment by Pub. L. 100–203 applicable to dispositions in taxable years beginning after Dec. 31, 1987, with special rules for non-dealers and coordination with Tax Reform Act of 1986, see section 10202(e)(1), (3), (5) of Pub. L. 100–203, set out as a note under section 453 of this title.
Effective Date
For
Effective Date
, see section 6(a)(4) of Pub. L. 96–471, set out as a note under section 453 of this title. Certain Repledges Permitted Pub. L. 100–647, title VI, § 6031, Nov. 10, 1988, 102 Stat. 3695, provided that: “(a) General Rule.—section 453A(d) of the 1986 Code (relating to pledges, etc., of installment obligations) shall not apply to any pledge after
December 17, 1987, of an installment obligation to secure any indebtedness if such indebtedness is incurred to refinance indebtedness which was outstanding on
December 17, 1987, and which was secured on such date and all times thereafter before such refinancing by a pledge of such installment obligation. “(b) Limitation.—Subsection (a) shall not apply to the extent that the principal amount of the indebtedness resulting from the refinancing exceeds the principal amount of the refinanced indebtedness immediately before the refinancing. “(c) Certain Refinancings Permitted.—For purposes of subsection (a), if—“(1) a refinancing is attributable to the calling of indebtedness by the creditor, and “(2) such refinancing is not with the creditor under the refinanced indebtedness or a person related to such creditor, such refinancing shall, to the extent the refinanced indebtedness qualifies under subsections (a) and (b), be treated as a continuation of such refinanced indebtedness.” Amendment by Pub. L. 99–514 Treated as Change in Method of AccountingFor provisions requiring change in accounting method in the case of any taxpayer who made sales under revolving credit plan and was on installment method under this section for such taxpayer’s last taxable year beginning before Jan. 1, 1987, see section 812(c)(2) of Pub. L. 99–514, set out as an
Effective Date
of 1986 Amendment note under section 453 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 453A
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110