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dschindler1
New Member

How should an insurance roll-over be treated?

We closed an insurance policy and used the all of the cash value to purchase another insurance policy. How do we account for this on our taxes since this should be a roll-over and not income?

2 Replies
HelenaC
New Member

How should an insurance roll-over be treated?

Your administrator would need to do a 1035 exchange to transfer your original insurance policy to your new insurance policy. The tax code says that the old insurance policy must be exchanged for a new policy—you cannot receive a check and apply the proceeds to the purchase of a new insurance policy.

1035 exchange is a rule that permits tax free transfers of “like assets” under the tax code. Like asset in this case means insurance product to insurance product. Specifically under 1035: cash value from a life insurance contract can be exchanged into a new annuity or life insurance.

  • You would receive form 1099-R - IRS.gov from your life insurance administrator. 
  • Your form 1099-R Box 7 would have Code 6 - Section 1035 exchange (a tax-free exchange of life insurance, annuity, or endowment contracts).
  • As you enter your 1099-R, TurboTax will recognize the Code 6- Section 1035 exchange and not tax it. Click on Where do I enter my 1099-R?

 

Octopus88
New Member

How should an insurance roll-over be treated?

Here's a further question.  I did a 1035 rollover of the cash value in my life policy to an annuity.  The cash value was about $28,000.  However, when I first had the policy, I contributed premiums in a total amount of about $80,000.  This is a difference of about $52,000.  Shortly after the transfer, I took $12,000 out of the annuity amount, leaving about $16,000 in the annuity, and now a cost basis of about $68,000.  If I cashed out the annuity at some point, I believe I could claim the $52,000 as a capital loss, and as an example, if I sold my house for a gain exceeding $250,000, could apply that capital loss to the proceeds from sale of the house, to reduce my liability for the amount exceeding $250,000.  I hope I have explained that clearly.  Is what I am stating true?  Is that something I could do with the capital loss from cashing out the annuity when there is a $52,0000 difference between the cash that was originally put into the life policy and the cash value when I closed it and did the 1035 transfer?  Rick

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