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Author: knepley Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121338  
Subject: Tax on municipal bond sales Date: 8/3/1999 2:06 PM
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About 10 years ago my wife invested in a number of municipal bonds (state exempt). Some were zero coupon and some not. My understanding is zero coupon are purchased at a discount price to face value & pay no interest - your "interest" is the difference between what you paid and what you get when you sell. The regular (non zero) bonds are purchased at a nominal face value and pay a semiannual interest payment. When you sell - if the bond market is the same as when you bought, the capital gain is a wash. (Sorry for the tutorial - I'm trying to check my own understanding here.)

These bonds start maturing next year (zero's 1st) at the rate of one per year. Next year I may need about 25% of the bond's total market value and I'm considering liquidating some of the bonds rather than my equity holdings if it's taxwise advantageous (taxable account).

My Question (about time you say - I agree), what are the capital gain implications of selling either a zero or non-zero before its maturity date in light of the fact that these are muni's? My understanding is that if I held them until they mature there is no capital gain because they are muni's. But for an early sale? Am I still exempt from capital gain tax?

Thanks for helping this newbie.
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Author: TaxService Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17884 of 121338
Subject: Re: Tax on municipal bond sales Date: 8/3/1999 4:46 PM
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About 10 years ago my wife invested in a number of municipal bonds (state exempt). Some were zero coupon and some not. My understanding is zero coupon are purchased at a discount price to face value & pay no interest - your "interest" is the difference between what you paid and what you get when you sell. The regular (non zero) bonds are purchased at a nominal face value and pay a semiannual interest payment. When you sell - if the bond market is the same as when you bought, the capital gain is a wash. (Sorry for the tutorial - I'm trying to check my own understanding here.)

These bonds start maturing next year (zero's 1st) at the rate of one per year. Next year I may need about 25% of the bond's total market value and I'm considering liquidating some of the bonds rather than my equity holdings if it's taxwise advantageous (taxable account).

My Question (about time you say - I agree), what are the capital gain implications of selling either a zero or non-zero before its maturity date in light of the fact that these are muni's? My understanding is that if I held them until they mature there is no capital gain because they are muni's. But for an early sale? Am I still exempt from capital gain tax?


*** Any gain from market discount is usually taxable on disposition or redemption of tax-exempt bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain from market discount is ordinary income.

You figure the market discount by subtracting the price you paid for the bond from the sum of the original issue price of the bond and the amount of accumulated OID from the date of issue that represented interest to any earlier holders. For more information, see Market Discount Bonds in chapter 1 of Publication 550.

A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.

For more information and links to the above publication, paste this to your keyword box and go to:
http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p171502.htm

"Jack"

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Author: hghcpa Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17886 of 121338
Subject: Re: Tax on municipal bond sales Date: 8/3/1999 5:00 PM
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My Question (about time you say - I agree), what are the capital gain implications of selling either a zero or non-zero before its maturity date in light of the fact that these are muni's? My understanding is that if I held them until they mature there is no capital gain because they are muni's. But for an early sale? Am I still exempt from capital gain tax?
##############

Some states may exempt gains from the sale of their own munibonds. This used to be the case in NC but they became greedy and changed the law a few years ago.

Pete



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Author: vargaj Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 17887 of 121338
Subject: Re: Tax on municipal bond sales Date: 8/3/1999 5:39 PM
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I guess I'm missing something here.

I thought the rule is that muni bonds are (can be) exempt from tax on interest, but capital gains are taxed.

I thought the rule is that (taxable) zero's accrue, but don't pay interest. The accrued interest is taxable in the year accrued. Not so obvious is that the taxable basis increases with the (taxed) interest accrual. Then when sold, a capital gain is taxed on the difference between the adjusted basis and the net received.

Wouldn't it be the same with muni's? Even if tax exempt, the basis increases with interest accrual and the capital gain is the differece in the adjusted basis and the amount received.

or am I comfused?

Joe Varga

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