Municipal bonds: FMSbonds.com - Don't miss the silver lining in the "Fed Watching" cloud

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DON'T MISS THE SILVER LINING IN THE "FED WATCHING" CLOUD!

The recent rise in interest rates provides a tremendous opportunity for holders of tax-free bonds!

Munis are the most flexible of all investment securities. They allow you to swap one block of bonds for another to establish a loss for tax purposes which can be used to offset capital gains taxes, while maintaining your position in the bond market.

This strategy is ideal if you have avoided taking stock market profits for fear of paying capital gains taxes.

BACKGROUND

Once again, fear of inflation (not inflation) has caused bond yields to rise. You can sell bonds to establish a loss to offset stock market profits or any other capital gains. As in 1994 and again in 1997, any Fed tightening will lead to lower long-term rates down the road. Once long-term rates begin to decline, this opportunity will be lost.

SWAP STRATEGY

Sell bonds that have losses.
At the same time, replace these bonds with new bonds which differ in at least two of the following three criteria:

Issuer
Coupon Rate
Maturity Date

This will satisfy the IRS "Wash Sale" rule which requires a swap into a substantially different security. (Trying to establish a loss in a stock sale requires a 31-day holding period before the same stock can be repurchased).

RESULT

Your bond sale establishes a loss for tax purposes.
When interest rates decline, you will enjoy the appreciation in the new bonds purchased.
By offsetting capital gains taxes, you will be dramatically enhancing the yield on your new bonds and saving real dollars.
If you have no gains to offset, you may deduct $3,000.00 per year from your adjusted gross income.
Any remaining losses can be carried forward, dollar for dollar, to offset capital gains in future years.

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Municipal bonds, like other fixed income instruments, are subject to changes in market price based upon factors including the level of interest rates, market conditions and credit quality of the issuer.

If you wish to sell your bonds before they reach maturity, you will
receive the market price at that time, which may be more or less than the price you originally paid. Yields will fluctuate if sold prior to maturity.