we have been reporting the interest payments annually but now need to report the lump sum payment and don't know how to
If you sold them this property as an installment sale and you did not use the form 6252 but reported the entire sale in the year of sale on the Sch D and have only been reporting the interest on the return since the sale then you will ONLY report the interest paid this year ... the pay off of the principal is not reported at all ... it was taken into consideration on the return in the year of sale.
However, if you have been reporting this yearly on the form 6252 then you will report the interest and principal paid as usual.
the question becomes how did you report the sale of the property? What type of property? was this your home that you sold at a loss? or a profit that exceeded the excludable gain? if there was a taxable profit how was this reported? you see depending on what occurred when you sold and how it was reported will determine what portion, if any, of the lump sum payment is taxable.