New York Advisory Opinion TSB-A-84 (2)I: If someone sells New York real property in exchange for a private life annuity and then moves out of New York, must the future annuity payments be accrued and taxed all at once under New York's change-of-residency rule?

Plain-English summary

R.W. Kaszubinski asked about a taxpayer who, in 1982, conveyed real property located in New York in exchange for a private life annuity, and then changed his residence from New York to Florida. The question was whether the future annuity payments must be "accrued" - included all at once in the resident portion of the year of the move - under Tax Law § 654(c)(1)'s special accrual rule for taxpayers changing from resident to nonresident.

The Department distinguished this from a fixed obligation like a lottery prize (see the companion opinion TSB-A-86(1)I, decided later, involving a Lotto jackpot). Under 26 CFR 1.451-1 and 20 NYCRR 148.10(a), an item only "accrues" if all the events fixing the right to receive it, and its amount, have already occurred - and a private life annuity's total payout depends entirely on how long the annuitant lives, a genuinely contingent and unknowable fact. Citing its own precedent (Matter of John S. Litherland), the Department held that because the future payments can't be determined with reasonable accuracy at the time of the residency change, they simply aren't accruable under the special accrual rule - so no lump-sum inclusion is required when the taxpayer becomes a nonresident.

Instead, the Department explained how each private annuity payment is taxed as it's actually received, following the federal component breakdown in Rev. Rul. 69-74: part of each payment is an excluded, tax-free return of the annuitant's investment; part represents capital gain attributable to the original sale of the New York real property; and part is ordinary annuity income. For a nonresident annuitant, the return-of-investment portion is automatically excluded from New York adjusted gross income; the capital gain portion remains taxable as income from the sale of New York real property under section 632(b)(1)(A) (since gains from New York real estate stay New York-source regardless of residency); and the ordinary annuity income portion is excluded from New York tax under section 632(b)(2).

What this means for you

New York property owners selling real estate for a private life annuity, who plan to move out of state

Moving away doesn't force you to accrue and pay tax on your entire future annuity stream up front - because the total payout depends on your lifespan, it's not a "fixed right" subject to the change-of-residency accrual rule. You'll instead be taxed, as a nonresident, only on the capital gain portion tied to the New York property as each payment comes in.

Nonresidents receiving private annuity payments originating from a New York real estate sale

Expect each payment to be split into three pieces for New York tax purposes: tax-free return of investment, taxable capital gain (because it's tied to New York real property), and excluded ordinary annuity income. Only the capital gain piece is New York-taxable to you as a nonresident.

Accountants distinguishing which deferred payment streams get accrued on a residency change

Compare a private annuity (payout contingent on lifespan, not accruable under § 654(c)) against a truly fixed obligation like a lottery prize with no contingencies (accruable in full, per TSB-A-86(1)I) - the accrual rule turns on whether the amount can be determined with reasonable accuracy at the time of the residency change, not merely on whether payments are deferred.

Common questions

Q: I sold New York real estate for a private life annuity and I'm moving to another state - do I have to pay New York tax on my whole future annuity stream right away?
A: No. Because the total annuity payout depends on how long you live, it's not a fixed, determinable right, so it isn't subject to New York's change-of-residency special accrual rule. You're taxed only as each payment is received.

Q: How is each annuity payment taxed once I've become a nonresident?
A: It's split into three parts: an excluded return of your original investment, a taxable capital gain tied to the New York real property sale (still New York-source income even as a nonresident), and ordinary annuity income, which is excluded from New York tax for a nonresident.

Q: Why is a private annuity treated differently from a lottery prize for accrual purposes?
A: A lottery prize (as in TSB-A-86(1)I) is a fixed, uncontingent right to a determinable amount, so it accrues in full at a residency change. A private annuity's payout is contingent on the annuitant's date of death, so its amount can't be determined with reasonable accuracy - it isn't accruable under the same rule.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a84_2i.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-84 (2) I
Income Tax
October 8, 1984

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I820617A

On June 17, 1982 a Petition for Advisory Opinion was received from R.W. Kaszubinski, 404
No. Main Street, No. Syracuse, New York 13212.
The issue raised is the accruability of payments received under a private annuity contract, for
purposes of Article 22 of the Tax Law. Petitioner describes a taxpayer who in 1982 conveyed real
property in New York in exchange for a private life annuity, and thereupon changed his residence
from New York to Florida.
Section 654(c)(1) of the Tax Law provides that where an individual changes his status from
resident to nonresident, such individual must, regardless of his method of accounting, accrue for the
portion of the taxable year prior to such change of status any items of income, gain, loss or deduction
accruing prior to the change of status. The phrase "accruing prior to the change of status" refers to
items "required to be included if a Federal income tax return were being filed for the same period
on an accrual basis." 20 NYCRR 148.10(a). The applicable Federal regulation provides that "Under
an accrual method of accounting, income is includible in gross income when all the events have
occurred which fix the right to receive such income and the amount thereof can be determined with
reasonable accuracy." 26 C.F.R. 1.451-1.
Since in the present instance the amount to be received subsequent to the close of the taxable
period in question is contingent upon the date of death of the annuitant, such amount can not in fact
be determined with reasonable accuracy and is accordingly not accruable under the Federal rule. It
is therefore not subject to the special accrual provision contained in Tax Law, §654(c)(1). Matter of
John S. Litherland, State Tax Commission, August 22, 1972.
Payments from such a private annuity as is the subject of this Advisory Opinion are divided,
for Federal purposes, into (1) excluded return of investment, (2) capital gain income, and (3)
ordinary annuity income. Rev. Rul. 69-74. These items should be treated, on the taxpayer's non­
resident return, as follows. The amount excluded as a return of investment is automatically excluded
from New York adjusted gross income. The amount representing the capital gain is subject to tax
as income from the sale of real property in New York. Tax Law, §632(b)(1)(A). The amount
representing ordinary annuity income is excluded from tax under Tax Law, § 632(b)(2). Delmhorst
v. State Tax Commission, 92 A.D. 2d 981, aff'd 60 N.Y. 2d 628; Epstein v. State Tax Commission,
89 AD 2d 256.

DATED: May 1, 1984

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

s/FRANK J. PUCCIA
Director
Technical Services Bureau
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR