Tax Facts
606 / What are the tax consequences to the obligor in a private annuity transaction?
Annuity payments made by the obligor are treated as capital expenditures for the acquisition of the property. No interest deduction is allowed with respect to the payments.1 Depreciation deductions may be taken, however, if the property is depreciable. The initial basis for depreciation is the present value of the annuity, as determined by the appropriate Estate and Gift Tax Valuation Tables ( Q 921). When actual payments exceed the initial basis, the basis for depreciation is the actual payments made less prior depreciation.2
When payments exceed the initial basis, loss is not deductible until the property is sold.3 If the property is sold after the annuitant’s death, the obligor’s basis for determining gain or loss is the total of annuity payments made less depreciation taken, if any.
If the property is sold before the annuitant’s death, the obligor’s basis for gain is the total payments actually made plus the actuarial value, as of the date of sale, of payments to be made in the future. The obligor’s basis for loss is the total amount of payments made as of the date of sale. If the selling price is less than the basis for gain but more than the basis for loss, the obligor realizes neither gain nor loss. Adjustment for annuity payments made after the sale may be made by deducting loss or by reporting additional gain.4
1. Garvey, Inc. v. U.S., 1 Cl Ct. 108, 83-1 USTC ¶ 9163 (U.S. Cl. Ct. 1983), aff’d, 84-1 USTC ¶ 9214 (Fed Cir.), cert. denied, 469 U.S. 823 (1984); Bell v. Commissioner, 76 TC 232 (1981).
2. Rev. Rul. 55-119, 1955-1 CB 352.
3. Perkins v. U.S., 701 F.2d 771, 83-1 USTC ¶ 9250 (9th Cir. 1983).
4. Rev. Rul. 55-119, supra.
When payments exceed the initial basis, loss is not deductible until the property is sold.3 If the property is sold after the annuitant’s death, the obligor’s basis for determining gain or loss is the total of annuity payments made less depreciation taken, if any.
If the property is sold before the annuitant’s death, the obligor’s basis for gain is the total payments actually made plus the actuarial value, as of the date of sale, of payments to be made in the future. The obligor’s basis for loss is the total amount of payments made as of the date of sale. If the selling price is less than the basis for gain but more than the basis for loss, the obligor realizes neither gain nor loss. Adjustment for annuity payments made after the sale may be made by deducting loss or by reporting additional gain.4
1. Garvey, Inc. v. U.S., 1 Cl Ct. 108, 83-1 USTC ¶ 9163 (U.S. Cl. Ct. 1983), aff’d, 84-1 USTC ¶ 9214 (Fed Cir.), cert. denied, 469 U.S. 823 (1984); Bell v. Commissioner, 76 TC 232 (1981).
2. Rev. Rul. 55-119, 1955-1 CB 352.
3. Perkins v. U.S., 701 F.2d 771, 83-1 USTC ¶ 9250 (9th Cir. 1983).
4. Rev. Rul. 55-119, supra.
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