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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121185  
Subject: Re: Interest Expense Date: 12/16/1998 7:42 PM
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[[Thanks Roy for your help.]]

My pleasure...

[[ I didn't pull any money out of the deal.]]

Perfect. Than you should have no problems.

[[ Also, I really would appreciate the additional info on
passive rules for residential rental property. Is that covered in the book as well? Does the book
discuss rental income/rental expenses?]]

The Motley Fool Investment Tax Guide doesn't really deal with real estate issues in any great detail (other than the gain exclusion on the sale of a personal residence). But we may cover real estate issues in the NEXT book.

As far as passive issues, go to the IRS web site and download/read IRS Publications 925 and 527. They will explain things in much greater detail.

[[ Also - I did think of one more tax question on an unrelated topic .]]

Okey Dokey....I'll let you off the hook...just this one time :-)

[[ I must be missing something because every year I hear the financial "experts" caution people from
buying into a mutual fund at the end of the year right before the fund makes a capital gain
distribution -due the taxes that will be owed on the distribution - . And every year when I hear this,
I think to myself - isn't that a good thing? I mean - why not buy into something -get an immediate
gain (when you weren't putting your money at any risk during the preceding months) - and so what
you have to pay tax on the gain? -doesn't the capital gain distribution represent money you
wouldn't have gotten otherwise? - or to put it another way - only if you had been in the fund all
along? - and by buying at the end of year - you didn't have to be? I hope I haven't confused you.]]

Believe me...it's a bad thing.

Here is a very brief and simple example...

You buy ABC Mutual fund on December 1. You buy 1,000 shares with a NAV at that time of $5/shares (we'll ignore the rip off sales fees and charges in this example...but please know that they are there).

On December 20th, the fund goes X-dividend with a payable date to holders of record on the 20th. (it really doesn't work this way...generally the x-dividend date is a few weeks before the "record" date...but this makes the example a bit easier to deal with). The dividend is $.50/share.

The next day, the fund value immediately drops to $4.50 per share to reflect the payment of the cash dividend.

You receive a dividend (either in cash or in shares...taxable either way) in the amount of $500, on which you'll pay taxes at your normal rate or LT capital gains rates (if these are capital gain distributions). Lets assume a regular distribution, and a tax rate of 28%. You'll see $140 in taxes go directly to good old Uncle Sammy.

So what do you now have for your $5,000 investment?

A mutual fund with a NAV of $4.50/share...or a total value of $4,500.

An after tax dividend in the form of cash in the amount of $360. That really stinks...at least in my opinion.

If you would have bought an individual stock, your full $5,000 investment would still be working, and you would not have "bought" a capital gain distribution, and would therefore have no taxes to pay.

That's basically it in a nutshell. Hope it makes a bit more sense now.

[[ After asking these questions I feel like only one of two things can happen:
(1) something that's obvious to everyone else in the world -but me- will be revealed
(2) or there'll be a chorus of "I've always wondered that too"]]

For the majority of readers who visit this folder, if they are really honest with themselves, it'll be #2. Trust me. So don't feel all alone on this one.

[[ thanks again!]]

Welcome...
TMF Taxes
Roy
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