Section 453A interest
The yearly charge on the tax still owed on the note.
453A Interest Charge Calculator
An installment note over $5,000,000 carries a yearly interest charge on the tax you have not paid yet (IRC Section 453A). Enter your sale and your note to see the applicable percentage, the charge in year one and every year after, what you keep by spreading the gain anyway, and what changes if the note is sized at the $5,000,000 line. Everything runs in your browser.
Your numbers
All in one year vs spread
Tax on the gain, 453A interest included.
Note sized at the line
Same sale, the note capped at $5,000,000 and the rest as cash at closing.
This is an estimate. Getting it right down to the tee takes your actual tax forms (returns, K-1s, depreciation schedules), a consult and a paid analysis. The first 15-minute scope call is free.
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These are estimates. Have a qualified tax professional run your real numbers in a 15-minute scope call.
Book my 15-minute callThis is an estimate. Getting it right down to the tee takes your actual tax forms (returns, K-1s, depreciation schedules), a consult and a paid analysis. The first 15-minute scope call is free.
Year by year: note balance, tax still owed and 453A interest
How the 453A interest charge is calculated
Section 453A adds a cost to big installment notes. It applies when you sell property for more than $150,000 on the installment method and the face amount of the notes from that year's sales still outstanding at the end of the year is more than $5,000,000 (IRC 453A(b)). Each year the note is outstanding, you pay interest on part of the tax you have not paid yet.
1. The applicable percentage
Take the note outstanding at the end of the year of sale, subtract $5,000,000 and divide by the note. A $9,000,000 note gives ($9,000,000 minus $5,000,000) divided by $9,000,000, or 44.4%. That percentage is set in the year of sale and does not change as the note pays down (IRC 453A(c)(4)).
2. The tax still owed on the note
The statute calls it the deferred tax liability: the gain not yet reported at year end, times the top federal rate for its kind. That is 25% on unrecaptured Section 1250 gain (building depreciation) and 20% on the rest of the long-term gain (IRC 453A(c)(3), IRC 1(h)). Your actual rates do not matter here; the top rates are used even if you are in a lower bracket. The 25% gain is reported first, out of the earliest payments (Treas. Reg. 1.453-12), so the share at 25% falls quickly.
3. The interest
Multiply the tax still owed by the applicable percentage and by the IRS underpayment rate for the last month of your tax year (IRC 6621(a)(2)). For individuals that rate is 7% for the quarters beginning July 1 and October 1, 2026 (IRS, Rev. Rul. 2026-15; IRS quarterly interest rates). You report it as additional tax on Schedule 2 of Form 1040, and an individual cannot deduct it (IRS Publication 537).
A worked example (2026, computed by the calculator's engine)
A married couple in California sells a commercial building for $12,000,000 with $600,000 of selling costs. Adjusted basis is $3,000,000 after $2,000,000 of building depreciation, so the gain is $8,400,000. They take $2,400,000 in cash at closing and carry a $9,000,000 note over 10 years at 6%, with $250,000 of other income a year.
- Applicable percentage: $4,000,000 over the line divided by $9,000,000 = 44.4%.
- Year one charge: $36,226. It falls each year as the note pays down: $33,074, $29,732 and so on, to $0 when the note is paid.
- All years: $195,137 of Section 453A interest.
- All in one year vs spread: a cash sale costs $3,201,874 of tax on the gain in 2026. Spread over 10 years, the total is $3,002,809 with the 453A interest included, so they keep $199,065 more, and $2,123,748 less tax is due in the year of sale.
- Sized at the line: with a $5,000,000 note and $6,400,000 in cash at closing, the 453A interest is $0 and the total tax is $2,914,943. The trade-off: more of the gain lands in 2026, so year one tax is $2,001,889 instead of $1,078,126.
Change the state, the note or the rate above and every number updates.
Ways sellers handle a note over $5,000,000
- Size the note at the line. Take the excess as cash at closing. The charge runs only on the share above $5,000,000, so a note of exactly $5,000,000 owes nothing.
- Co-owners. The test is per taxpayer. Partners in a partnership apply it at the partner level, and spouses who each own half often test each half; ask your CPA.
- Pay it anyway. The charge is often smaller than the bracket savings and the tax still working for you on the note. The comparison above shows whether spreading still comes out ahead after the charge.
- Farmland. Farm property is exempt (IRC 453A(b)(3)). See the land sale tax calculator.
The pledge rule
Borrow against the note and the net loan proceeds count as a payment on it, so the gain they represent is taxed when you receive the loan (IRC 453A(d)). Unlike the interest charge, this has no $5,000,000 threshold: it reaches any non-dealer installment sale over $150,000. Enter a loan amount above to see the gain it would pull forward.
What this calculator leaves out
One sale, one note with level yearly payments, real estate held more than a year, the 2026 tables carried forward for later years, and one underpayment rate for every year. It does not model other installment notes from the same year (they count toward the $5,000,000 together), Section 1245 recapture (taxed in the year of sale and never part of the note's gain), the alternative minimum tax effect of the charge, or state interest charges. Read the full rules in Section 453A: interest charge and pledge rule on large notes.
Sources
- IRC 453A: $150,000 and $5,000,000 tests, applicable percentage, deferred tax liability, pledge rule (statute as in force October 2026).
- IRC 6621(a)(2) and IRS news release, quarter beginning October 1, 2026: underpayment rate 7%.
- IRS Publication 537, Installment Sales: reporting the interest as additional tax.
- Rev. Proc. 2025-32: 2026 brackets used for the spread comparison.
Questions about the 453A interest charge
What is the Section 453A interest charge?
If you sell property for more than $150,000 on an installment note and the notes from that year's sales still outstanding at year end total more than $5,000,000, you owe interest each year on part of the tax you have not paid yet. The charge is the tax still owed on the note, times the share of the note above $5,000,000, times the IRS underpayment rate for the last month of the year (IRC 453A(c)).
How do you calculate the 453A interest charge?
Three steps. 1) Applicable percentage: the note outstanding at the end of the year of sale minus $5,000,000, divided by the note; it is fixed in the year of sale. 2) Tax still owed on the note: unrecognized gain times the top rate for its kind, 25% on unrecaptured Section 1250 gain and 20% on the rest. 3) Multiply 2) by 1) and by the IRS underpayment rate (7% for October to December 2026). Repeat every year the note is outstanding.
What is the IRS underpayment rate for 2026?
7% a year for individuals for the quarters beginning July 1 and October 1, 2026 (IRS news release for the fourth quarter of 2026, Rev. Rul. 2026-15). It is the federal short-term rate plus 3 points and resets every quarter; the 453A charge uses the rate in effect for the last month of your tax year.
Is the 453A interest charge deductible?
Not for individuals. IRS Publication 537 says an individual reports it as additional tax on Schedule 2 (Form 1040) and cannot deduct it. A corporation can deduct it.
Does the $5 million limit apply to each spouse?
The test is applied per taxpayer. When spouses each own half of the property, many advisers apply the $5,000,000 test to each spouse's half of the note. IRS guidance on joint filers is thin, so confirm with your CPA before you size a note on that basis. The checkbox in the calculator shows both ways.
Which sales are exempt from Section 453A?
Sales of $150,000 or less, farm property (property used or produced in the trade or business of farming), personal-use property sold by an individual, and timeshares and residential lots under the Section 453(l)(2)(B) election (IRC 453A(b)). Farmland sold on a large note owes no 453A interest.
Can I borrow against an installment note over $5 million?
If you pledge the note as security for a loan, the net loan proceeds are treated as a payment on the note and the gain they represent is taxed when you get the money (IRC 453A(d)). The pledge rule applies to any non-dealer installment sale over $150,000, even when the note is under $5,000,000.
Keep going
- Installment sale calculator: cash sale vs seller financing vs a structured installment sale.
- Section 453A interest charge and pledge rule: the rules in full.
- Seller financing calculator: the note and the seller's tax by year.
- Land sale tax calculator: land and farmland, all in one year vs spread.
- Capital gains tax on $1 million: $1M to $10M gains by state, all in one year vs spread.