Bonds

Sometimes investors will take advantage of changes in the economy by doing a municipal bond swap. If you swap a municipal that has fallen in price for a similar bond, you may take a deduction for the capital loss that may be used immediately. The new bonds must differ in at least two of the following three criteria:

  • Issuer
  • Coupon Rate
  • Maturity Date

By changing these three criteria, you may satisfy the IRS "Wash Sale" rule which requires a swap into a substantially different security.

Swapping Into a Market Discount Bond
If you swap into a market discount bond, you may owe income taxes on the discount amount of the new bond depending on how it is liquidated in the future. However, as with taxable bonds, an investor can elect to defer this tax over the life of this municipal.

Swapping Into Par, OID or Premium Bonds
One approach when realizing losses in municipals may be to restrict reinvestment to municipals:

  • Selling at par or slightly under par
  • At premium to par
  • That were issued at a discount thereby circumventing the tax rules on market discount bonds

LEARN ABOUT MUNICIPAL BONDS AND TAXES FREE PORTFOLIO REVIEW