Basis in bonds

[veritas]

Elderly taxpayer had 3 municipal bonds redeemed in 2005. Of course she does not remember when she acquired them and of course she does not know what she paid for them. So my question to my esteemed bloggers is;

is the basis zero or what?

[Roland Slugg]

Probably no gain or loss

You said the bonds were redeemed, and if that's true, there would normally be no gain or loss. Even if the bonds were bought at a premium or discount, the incremental increase or decrease between their cost and their redemption value represents an adjustment to the T/F interest. If the bonds were redeemed early, at a premium ... typically 1% or 2% ... the premium represents capital gain. Report each redemption on Schedule D showing the bond's basis as the same as its par value.

[Bill Tubbs]

the esteemed Roland...

Not to dispute the esteemed Roland Slugg (hello Roland)...

I generally agree that selling price is usually very near the purchase price, but the bonds that I've seen, the client has paid a small transaction fee up-front when purchasing the bonds -- $6 on a $10,000 bond. (No, it's not $6 of interest, it's a commission charge). So, every bond she sells she ends up with a $6 capital loss because of the commission charge from the purchase of the bond. Some of the bonds she's held for 10-15 years, and instead of digging back through all her records, we usually just punt at a $5 commission charge and be done with it -- if an auditor wants to quibble over a buck or two, we'll give them the records and they can dig thru them

So, you may want to see if there are any commissions or other fees involved with the purchase/sale of the bond. If not, then no gain/loss. But if there are, there would be a small loss.

Bill

[Roland Slugg]

Hello Bill

In my opinion the commission and other transaction costs, if any, associated with the purchase of muni bonds are non-deductible, since those costs relate to T-E income. Regs. §1.265-1(a)

[Bill Tubbs]

Ahh.. muni's

In my opinion the commission and other transaction costs, if any, associated with the purchase of muni bonds are non-deductible, since those costs relate to T-E income. Regs. §1.265-1(a)

Good point -- I had missed the fact they were "municipal" bonds -- I was thinking regular bonds.

Bill

[veritas]

Thank you for your replies.

Roland & Bill