If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. That interest is taxable when you receive it. If you receive interest on an installment sale, you can report it on Form 1040 (PDF), Form 1040A (PDF), or Form 1040EZ (PDF):
If your taxable interest income is more than $1,500, be sure to show that income on Form 1040 Schedule B (PDF).
You cannot file Form 1040EZ if your interest income is more than $1,500.
For additional information on interest income, refer to: Tax Topic 403, Interest Received.