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Lou, Tax Preparer
Category: Tax
Satisfied Customers: 404
Experience:  25+ yrs Experience Personal Income Taxes - Former DM for H&R Block in California
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Can I deduct a surrender charge on a non-qualified annuity

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Can I deduct a surrender charge on a non-qualified annuity that was surrender to create a downpayment on an investment property? It seems to me that an argument could be made that in a case like this, the surrender charge could be considered as an incurred "financing fee" and therefore deductible at the time the investment property is purchased.
Submitted: 8 years ago.
Category: Tax
Expert:  Lou replied 8 years ago.

Hello and thank you for contacting JustAnswer. We appreciate the opportunity to be of service to you,


While your argument may have merit, the only way to be sure is to attempt to take the "surrender charge" as a deduction and wait to be audited. There is no definite way to be sure. The question would be... where to you take the deduction?


The instructions for line 30 are very specific in that you are to enter any penalty from early withdrawal of savings or certificates of deposit from form 1099-INT. Absent that form there is no mechanism I know of to account for the deduction you are speaking about.


If you attempt to use Schedule A Investment Expense deduction you will find that expenses for passive losses are not allowed. Annuities would be considered passive investments.


It's not that I don't empathize with your position, it's just that I'm trying to play "devil's advocate".


If you have further questions about this topic please get back to me.


Let me know what you decide and how you make out.

Customer: replied 8 years ago.
I would anticipate taking the deduction on Schedule E as a fee expense, perhaps as a bank or finance fee. It would be another expense related to the expense of operating the property I would think.

Is there any guidance offered by Tax Letters from the IRS on this question to your knowledge?

Expert:  Lou replied 8 years ago.

How would you get it to the E. If you look at page 2 of the Schedule E those entries come from either K-1's, Partnerships, Passive Activities (business or real estate), etc.


I know of no tax letters, rulings, etc. that address this issue.


I just think it would be disallowed at audit.


If want further discussion on this issue I am happy to continue. If you decide to go ahead, let me know how you make out.

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