Yes. The monthly interest only payments would be taxed as income income as your ordinary income tax rate.
Yes, the down payment would be capital gains (assuming your parents lived there more than 12 months so it is a long term asset) in the year you make the deal. Unless you opt out of the installment sales method, you would report the gain on the portion of the sale made each year. You would deduct your basis on a prorated basis from the sale each year as well.
So if your basis in the house was $200k and you sold the house for $430k with a 5 year term, your profit on the house would be $230k. Your profit percentage would be 53% (230,000/430,000) so 53% of your $140k down would be taxable profit.
The rest of the principal would be taxed in the same way in the year you received the payments.
There are not really any other tax implications for doing this, other than increasing your income each year which does result in higher taxes. However, depending on the profit received each year, depending on your other income, you may end up with a lower year over year capital gains tax rate than you would if you claimed the sale all at once.
Installment Sales Pub 537
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