A 1035 exchange defers gain specifically on a life insurance, endowment, or annuity contract exchanged for another qualifying contract — the insurance-product equivalent of a 1031 real estate exchange.
How it works
The realized gain (cash value minus cost basis) is fully deferred in a qualifying exchange, with the original cost basis carrying over into the new contract rather than resetting. Cash “boot” received outside the exchange is taxable immediately, up to the amount of gain.
What this does not include
This computes the gain-deferral mechanics only — it doesn’t verify the exchange qualifies under IRC §1035 (both contracts must be the same type of product, e.g. annuity for annuity, not annuity for life insurance in most directions).
How to use this calculator
- Enter the old contract’s cost basis and cash value at exchange.
- Enter any cash boot received outside the exchange.
Frequently asked questions
Can I exchange a life insurance policy for an annuity?
Yes — life insurance to annuity is a permitted direction under §1035, though the reverse (annuity to life insurance) generally is not.
Why does the basis carry over instead of resetting?
Because the gain is deferred, not eliminated — carrying the old basis forward ensures the deferred gain is eventually taxed when the new contract is surrendered or annuitized.
Is a 1035 exchange the same as surrendering and repurchasing?
No — surrendering a contract for cash and buying a new one triggers immediate taxation of any gain; a 1035 exchange must go directly from the old carrier to the new one to qualify for deferral.
