Muni bond premium

[appelman]

This has , I think, been discussed before, but I still get confused.

The original issue premium on a municipal bond is amortized over the life of the bond. Am I correct that this also applies to the premium when the bond is purchased in the secondary market, and also to the premium that may result from step-up when a bond is inherited? And if a bond is called before maturity, or is sold in the open market, shouldn't the amortization be incomplete, so that some of the premium remains as part of the basis in figuring gain or loss?

[Gary2]

The way I remember this is that OID is an important concept, indicating that there's a difference between original issue discount and market discount. On the other hand, we never hear about OIP, because there's no difference between original issue premium and market premium. And yes, if you sell before maturity, you haven't amortized the entire premium, so it's still in the basis.

As for inherited bonds, Pub. 550 references treasury regulations for that case, so you have some homework.

[appelman]

Where in 550?

Gary, can you tell me where in Pub. 550 there is a reference to inherited bonds? I can't seem to find anything, even with a search. Thanks.

[Gary2]

Gary, can you tell me where in Pub. 550 there is a reference to inherited bonds? I can't seem to find anything, even with a search. Thanks.

Sorry, it's in the paragraph on basis in the section on Bond Premium Amortization. However, the precise wording is "basis has to be determined using the basis of the person who transferred the bond to you." This isn't exactly what happens with inheritance, but is enough to justify an excursion to the cited regulations, 1.171-1(e).

I get frustrated with Acrobat Reader's inability to properly cut and paste from a multi-column layout, which is why I didn't just paste the entire paragraph to begin with.

[Roberts]

You don't get to take a loss on muni bonds purchased at a premium. The client's buying the bond at it's yield to maturity.

On the other hand if they purchased a Unit Investment Trust that invests in muni bonds, they qualify for a capital loss when the trust is redeemed. A lot of brokers and tax pros don't realize this.

[appelman]

1.171-1(e doesn't really address the issue.

But I am thinking that an inheritance is equivalent to a purchase at FMV, and you amortize any resulting premium over the remaining life of the bond. Seem reasonable to everyone?