IRS INTENDS TO STOP PRIVATE ANNUITY TRUSTS

We have received many questions recently from taxpayers about Private Annuity Trusts, which are being marketed as an alternative to Section 1031 Exchanges.  The IRS has proposed new regulations to halt what are sometimes called “synthetic exchanges” employing private annuity trusts (“PATs”).  The IRS states that some taxpayers are inappropriately exchanging highly appreciated property for annuity contracts usually issued by family members or by business entities controlled by family members.

In this proposed regulation, most exchanges of property for annuities will be characterized as if the property had been sold and the proceeds were used to purchase the annuity. The amount realized would be the fair market value of the annuity determined under IRC §7520.  Any gain from the exchange of the property for the annuity contract will have to be recognized.  This effectively puts an end to exchanges of appreciated real estate for annuity contracts.

If adopted, these regulations are scheduled to take effect retroactively for exchanges (of property for a private annuity) taking place after October 18, 2006. 

1031 EXCHANGES AND SECURED INSTALLMENT SALES ARE THE ONLY ALTERNATIVES

If the proposed regulation is adopted and PATs become extinct, the only options most taxpayers will have to defer gain is either to exchange under Section 1031, or to take installment sale treatment under Section 453.  Since a seller often does not want to be left with the risk that a buyer may default if the seller takes back a note from the buyer, sellers who do not want to acquire a Replacement Property in a 1031 exchange are often stuck.

Now, there is an alternative.  Using a Secure Installment Sale provided by Structured Sales Northwest, LLC, a seller can accomplish an installment sale under IRC Section 453 while receiving the payment stream through an annuity rather than from the buyer directly.  Our sister company, Structured Sales Northwest, is ready to provide this wonderful product.  See www.structuredsalesnw.com for more information.