Home / Articles

Imputed Interest: Sections 483 and 1274 Explained for Sellers

By Hans Goldstein · Updated 2026-09-27

Imputed interest is interest the tax law says you received even though your note did not charge it, or charged too little. On a seller-financed sale, if the note's rate is below the applicable federal rate (AFR), IRC §483 or §1274 recharacterizes part of the principal as interest. Your selling price and capital gain go down, your ordinary interest income goes up, and under §1274 you may owe tax on that interest years before you are paid.

This article is the mechanics: which section applies, how to calculate the amount, and what it costs. For choosing the rate you actually charge, see seller financing interest rate. For the rate tables themselves, see applicable federal rate.

Why the tax law imputes interest

Without these rules, a seller could raise the price and drop the interest rate, turning ordinary interest into lower-taxed capital gain. The buyer would also get a bigger depreciable basis. §483 and §1274 close that door by testing every deferred-payment sale against a market-based rate.

The test is simple to state. A contract has adequate stated interest if the stated principal is no more than the present value of all payments, discounted at the test rate, compounded semiannually (§1274(b)(2)(B), (c)(2); §483(b)). In practice: if your note's rate is at least the AFR for its term, you pass.

Section 483 vs Section 1274: which applies

Both sections use the same test rate. They differ in timing.

Sales where §1274 does not apply, so §483 does (Pub. 537, §1274(c)(3)):

• Total payments of $250,000 or less.
• Sale of an individual's main home.
• Sale of a farm for $1 million or less by an individual, estate, testamentary trust, small business corporation or partnership.
• Certain land transfers between related individuals (and there the §483 test rate is capped at 6%, §483(e), up to $500,000 of sales per year between the same individuals).
• Notes that qualify as cash method debt instruments and for which both parties elect (§1274A(c)). Pub. 537 lists the 2025 limit as $5,211,900 of stated principal, adjusted each year.

Where neither applies: sales where the price cannot exceed $3,000 (§483(d)(2)), and contracts with no payment due more than 1 year after the sale.

The rate caps. For seller financing up to an inflation-adjusted amount ($7,296,700 for 2025 per Pub. 537), the test rate cannot exceed 9%, compounded semiannually (§1274A). That cap only matters when the AFR is above 9%.

How to calculate imputed interest in four steps

1. Find the test rate. Use the AFR for the note's term (short, mid or long, by weighted average maturity), semiannual compounding, and the lowest rate in the 3 months ending with the month of the binding contract (Pub. 537 lets you use the 3 months ending with the month of sale if lower).
2. List every payment due under the note and its date.
3. Discount each payment to the sale date at the test rate, compounded semiannually. Add them up.
4. Compare. Total payments minus their present value is the imputed interest. The present value plus any down payment is your recomputed selling price.

A spreadsheet does this in minutes. There is no need for a special imputed interest calculator; the discounting is the same math a bond uses.

Simple example 1: a zero-interest balloon note under Section 1274

Simple example. Assumptions: a seller sells investment land in October 2026 for a stated $600,000. Basis is $200,000. The buyer pays $100,000 down and signs a $500,000 note with no interest, due in one payment in 5 years. The note is over $250,000, so §1274 applies. Test rate: mid-term AFR, semiannual, 4.56% (Rev. Rul. 2026-19), assumed to be the lowest in the 3-month window.

Present value of the note: $500,000 discounted 10 semiannual periods at 2.28% = $399,083. Imputed interest (OID): $500,000 minus $399,083 = $100,917. Recomputed selling price: $100,000 + $399,083 = $499,083. Recomputed gain: $499,083 minus $200,000 = $299,083, not $400,000.

The seller must accrue the OID into income each year on a constant-yield basis, even though no cash arrives until year 5:

What it costs. Assume married filing jointly, $120,000 of other taxable income each year, and 2026 federal brackets throughout. If the full $400,000 were taxed as capital gain under the installment method, federal income tax plus the 3.8% net investment income tax on the sale would total about $67,727 over the six years. With the imputed interest, the total is about $72,050, roughly $4,300 more, and about $17,400 of tax falls in years 1 to 4, on OID accruals, before any cash arrives on the note. (Figures computed with the §1(h)(1) ordering on 2026 MFJ brackets; state tax excluded.)

The fix was cheap: a note stated at the AFR would have avoided the recharacterization and the phantom income.

Simple example 2: a smaller sale under Section 483

Simple example. Assumptions: total payments of $240,000, so §483 applies. $40,000 down, then five annual principal payments of $40,000 with no interest. The weighted average maturity is 3 years, so the short-term AFR applies: 4.21% semiannual (October 2026).

Present value of the five payments is $176,808, so the unstated interest is $23,192. Under §483 it is allocated to each payment using the constant-yield method and reported when each payment is received:

Same economics, better timing: no income before cash.

What imputed interest changes on your return

• Selling price and gain go down. Pub. 537: you "reduce the stated selling price of the property and increase your interest income." Your gross profit percentage is computed on the reduced price.
• Interest is ordinary income and portfolio income. Passive losses cannot offset it (Temp. Reg. §1.469-2T(c)(3)), and it is net investment income for the 3.8% tax.
• Form 6252 uses the reduced price. The imputed interest is reported as interest (or OID) on Schedule B, not on Form 6252.
• The buyer's side mirrors yours, except that a buyer of personal-use property generally cannot deduct the imputed interest (Pub. 537). A business buyer gets a lower basis and more interest expense.
• Depreciation recapture does not shrink. Recapture is based on depreciation taken, so a lower price reduces the capital gain layer first. See the installment sale guide for how the layers stack.

Imputed interest outside of sales

People also search "imputed interest" for two other situations:

• Below-market loans (§7872). Family loans, employer loans and shareholder loans at less than the AFR. The forgone interest is treated as paid, with gift or compensation consequences. See the family loan section of the AFR article.
• Employer-provided group term life insurance over $50,000. Payroll calls this "imputed income." It is unrelated to §483 and §1274.

Bottom line

Imputed interest is the tax law's way of refusing a zero or low rate on seller financing. If your note charges at least the AFR for its term, compounded semiannually, it does not apply. If it charges less, the shortfall becomes ordinary income, and under §1274 you may pay tax on it every year before the cash arrives. Set the rate at or above the AFR when you sign, and model the payments in the calculator before you commit.

Questions to ask your CPA

• Does §483 or §1274 apply to my sale, and does any exception or rate cap apply?
• What is my note's weighted average maturity, and which AFR month is the lowest in my window?
• If the note is below the AFR, what OID or unstated interest will I report each year?
• Does the §1274A cash-method election make sense, and will the buyer sign it?
• How does the recomputed selling price change my gross profit percentage and Form 6252?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.