Apparently, if the sale has resulted in a loss, because the sale proceeds are less than the cost basis, the owner will have realized an ordinary loss. Such losses generally may not be deducted by individuals who entered into the annuity contract for personal reasons but may be claimed in connection with the owner’s trade or business or in a transaction entered into for profit. [IRC Sec. 72(s)(1).]
If the new owner elects to take payout provisions, the payments will be taxed in the same way they would have been had the original owner retained the contract, except that they will be calculated with the new owner’s life expectancy, etc. If the new owner is a corporation or other nonnatural person, those provisions will apply to annual increases in the contract values.
Source: This is an excerpt from The Variable Annuity Handbook, 2nd Edition (2005), by Gary H. Snouffer, J.D., CLU, pp. 221-222. The book is published by The National Underwriter Company, Cincinnati, Ohio, which also publishes the Annuity Sales Buzz e-newsletter. Both publications are products of Summit Business Media LLC, Erlanger, Ky.