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Chapter 9. Insurance and Annuities > 1035 Tax-Free Exchanges

1035 Tax-Free Exchanges

In real estate, when you sell your home, you have just over six months to purchase a home of equal or greater value and avoid having to pay capital gains tax. The tax-free exchange of real estate is treated under section 1031 of the IRS code. Annuities are afforded that same right through what is called a 1035 tax-free exchange (section 1035 of the IRS code). That means that you are allowed to move from one annuity contract to another without paying income taxes on the gain as long as you don't take constructive receipt of the money. In other words, if the money is sent from one company to another (or endorsed by you to the new company without being cashed), your gain is protected.

The SEC and the various state insurance departments have been cracking down on what they consider excessive or unnecessary 1035 exchange activity. These are exchanges that are not warranted for any reason other than to generate a new commission for the salesperson. It's a good thing that there has been a crackdown on these exchanges, and you should keep your eyes out for anyone trying to convince you to exchange your contract without a solid reason.


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