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Dear Tax Talk,
I sold a piece of property on the installment sale method and the buyer has been making payments for years. In the sales agreement, the buyer was required to have insurance that would pay off the loan if she died. She died recently, and I am the beneficiary of a life insurance policy that almost pays off the debt. Will the life insurance be taxable as if I received a payment on the loan?
--Carolyn
Dear Carolyn,
Every once in a while, I get a question out of
the ordinary that makes me pull all the books
off the shelves. Well, we don't actually use books
anymore, but certainly we do a lot of Web surfing.
You probably ask the question because
you know that the general rule is that life insurance
is tax-free to the recipient. An exception to
this rule is the transfer of a life insurance
contract for valuable consideration. Because the
policy was issued in your name as beneficiary
for the transfer of the land, this rule would
come into play.
When you report the sale of property
under the installment sales rules, part of every
payment is applied to your original cost in the
sold asset, and part is applied to gain on the
property. This is done based on your gross profit
percentage. The collection of the life insurance
proceeds would be considered just as any other
collection on the loan you had against the property.
Assuming you receive the remaining balance of
the loan that was not paid off through insurance,
your gross profit is the same and your gain is
the same as if you had just been paid otherwise.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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