Private Annuity vs Installment Sale: Taxes After the 2006 Rules
A private annuity is a sale in which the buyer, usually a child or a family trust, pays you a set amount for life in exchange for your property, and the payments stop when you die. It once let sellers spread gain over their life expectancy, but proposed regulations issued in 2006 would tax the whole gain in the year of the exchange. An installment sale under §453 still spreads the gain as payments arrive. So today a private annuity is mainly an estate planning tool, not an income tax deferral tool.
This page explains the old and new rules, runs a labeled simple example, and compares the two side by side. For the basics of spreading gain, see the installment sale guide.
What a private annuity is
- You transfer property (land, a business interest, stock) to a buyer.
- The buyer promises fixed payments for your life, or for the joint lives of you and your spouse.
- The buyer is not in the business of selling annuities. It is a family member, a family trust or a family entity.
- The promise is usually unsecured. If the buyer fails, you are an unsecured creditor of your own family.
- When you die, payments stop. Nothing is left to include in your estate.
The payment amount is set with the IRS actuarial tables and the §7520 rate so that the present value of the annuity equals the property's value. If the annuity is worth less than the property, the difference is a gift.
The old rule vs the 2006 proposed rules
| Question | Old treatment (Rev. Rul. 69-74) | Proposed Reg. §1.1001-1(j) and §1.72-6(e) (2006) |
|---|---|---|
| When is gain taxed? | Spread over your life expectancy as payments came in | "the entire amount of the gain or loss, if any, is recognized at the time of the exchange, regardless of the taxpayer's method of accounting" |
| Amount realized | Tied to annuity payments | The fair market value of the annuity, valued under §7520 |
| Covers secured and unsecured annuities? | Unsecured only got deferral | Any annuity contract received for property |
| Status | Superseded in practice | Proposed October 18, 2006; not finalized, not withdrawn as of the September 2026 eCFR |
The preamble language quoted above is from the Federal Register notice of the proposed rules (71 FR 61441). The proposal generally applies to exchanges after October 18, 2006, with a transition rule for certain earlier deals. Proposed regulations are not binding, but they announce how the IRS reads the law, and most advisors do not plan against them.
The IRS target was the "private annuity trust," a structure marketed to sellers who wanted to sell appreciated property, have a trust sell it for cash, and take lifetime payments with deferred gain. The proposed rules remove that deferral.
Simple example: tax in year one
Simple example. Assumptions: land worth $1,000,000, basis $200,000, gain $800,000, all long-term capital gain (no depreciation). You are married filing jointly with $80,000 of other taxable income. 2026 federal brackets and the 3.8% net investment income tax, computed with the §1(h)(1) ordering. State tax ignored. Interest on the note and the annuity's income portion are ignored to keep the comparison on the gain.
| Private annuity (proposed rules) | 20-year installment sale | |
|---|---|---|
| Gain taxed in year one | $800,000 | $40,000 |
| Federal income tax on that gain | $130,480 | $3,165 |
| Net investment income tax | $23,940 | $0 |
| Year-one tax on the sale | $154,420 | $3,165 |
| Cash received in year one | One annuity payment | One note payment |
In the installment sale, $18,900 of each year's $40,000 gain falls in the 0% bracket and the rest at 15%, so the total federal tax over 20 years on the gain is about $63,300 if nothing else changes, versus $154,420 due at once under the private annuity. The annuity seller pays the whole tax up front while collecting the money over life. Run your own installment numbers in the calculator.
Where a private annuity still fits
Income tax deferral is mostly gone, but the estate tax logic remains:
- Nothing left at death. Payments stop when you die, so the property and the stream are out of your estate. With a note, the unpaid balance is in your estate.
- Mortality bet. If you die early, the family paid less than the property was worth. If you live long, they pay more.
- Health limits. The §7520 tables cannot be used for someone who is terminally ill as the regulations define it, so a seller in poor health cannot rely on them.
A self-cancelling installment note aims at the same "nothing left at death" result while keeping installment reporting during life, which is why SCINs replaced many private annuities after 2006.
Private annuity vs installment sale vs structured sale
| Feature | Private annuity | Seller-financed installment sale | Structured installment sale |
|---|---|---|---|
| Who pays you | Family member or family trust | The buyer | An assignment company, from an annuity or funding agreement it owns |
| Gain timing | All at exchange (proposed rules) | As principal is received (§453) | As payments are received (§453) |
| Payments end | At your death | When the note is paid | Per the schedule you chose |
| Left in your estate | Nothing | Unpaid note | Remaining payments |
| Your credit risk | Unsecured, on family | The buyer, usually secured by the property | Unsecured creditor of the assignment company |
| IRS guidance | 2006 proposed regs | §453 and regulations | No ruling specifically approves the structure |
A structured installment sale is a different animal: the buyer pays cash at closing, a third-party assignment company takes on the payment obligation, and the seller relies on §453 for deferral. Commissions are built into the pricing, and the seller is an unsecured creditor.
For sales to family on a note, read the related-party installment sale rules, and for what happens to a note when you die, see installment notes at death.
Bottom line
A private annuity used to be a way to spread gain over your life. Under the 2006 proposed regulations, the full gain is taxed in the year of the exchange, so an installment sale beats it for income tax in almost every case. What remains is an estate planning use, with a mortality bet built in. Get the valuation right and assume the proposed rules apply.
Questions to ask your CPA
- If we use a private annuity, will you report all the gain in year one under the proposed regulations?
- How is the annuity valued, and is any part of the transfer a gift?
- Am I healthy enough that the §7520 tables apply to me?
- What happens to my family's finances if I live well past my life expectancy?
- Would a self-cancelling installment note or an ordinary installment sale do the same job with better tax timing?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.