Section 1035 Exchange Explained – Paul Gaulkin CPA

Life insurance policyGains from the sale, surrender or lapse of a life insurance policy during the life of an insured taxpayer are generally considered ordinary income to the owner of the policy. Section 1035 allows for certain tax free exchanges of life insurance policies, endowment policies and annuities. This will allow for certain exchanges without the immediate recognition of gain.

Types of Section 1035 Exchange

Basically, the income tax consequences are deferred or postponed, and the basis of the old policy transfers to the new policy. The types of exchanges that may occur under Section 1035 include:

1. A life insurance policy for another life insurance policy, qualified long term care insurance contract, endowment contract or annuity.

2. An endowment contract for another endowment contract, qualified long term care insurance contract or annuity.

3. An annuity for another annuity or qualified long term care insurance contract.

For a policy under a 1035 exchange to qualify, the new policy must have the same insured and annuitant after the exchange as the policy did before the exchange.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.


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