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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
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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 a 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, a portion of every payment is applied to your original cost in the sold asset, and part 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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