The Treasury Department and the Internal Revenue Service issued proposed regulations addressing the tax treatment of an exchange of property for an annuity contract.
The proposed regulations would apply the same rule to exchanges for both private annuities and commercial annuities, tightening a popular tax-deferral strategy.
A decades-old IRS ruling generally postpones tax on the exchange of appreciated property for a private annuity, which is inconsistent with the same tax treatment of exchanges for commercial annuities or other kinds of property. This ruling was originally based on the assumption that the value of a private annuity contract could not be determined for federal income tax purposes -- an assumption which is no longer correct.
The guidance issued this week proposes declare such a ruling obsolete -- essentially ending the capital-gains tax deferral for such deals and instead taxing a seller on the full, fair-market value of the annuity upfront.
The new regulations would only affect new annuity transactions done later than Tuesday and do not affect charitable gift annuities. Certain deals that the IRS and Treasury feel have a lesser likelihood of abuse, have a later effective date.
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