Municipal bonds: FMSbonds.com - Tax swap saves real dollars

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A TAX SWAP SAVES REAL DOLLARS

Although interest rates have declined steadily since 1982, they have not come down in a straight line. There have been intermittent periods in which rates have ticked up in the context of this long-term decline (most notably in 1987 and 1994). 1999 is proving to be another one of these years.

Last October, 30-year Treasury bond yields bottomed out at 4.72%. Since then, Treasury yields have moved up and bond prices have dropped approximately 20%.

Tax-free bonds and bond funds have shared the same fate, albeit in less dramatic fashion. Still, many municipal bonds are off 12-15% from their highs.

There is a simple strategy that you can employ to take some of the sting out of the depressed prices of your bonds:

Establish a loss for tax purposes by selling bonds that are trading below your cost.
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 that can be netted out against capital gains.
By offsetting capital gains taxes, you will be enhancing the yield on your bonds and saving real dollars.
If you have no gains to offset, you may deduct $3,000 from your adjusted gross income.
Any remaining losses can be carried forward, dollar for dollar, to offset capital gains in future years.
When interest rates decline, you will enjoy the appreciation in your new bonds.

Act now! We expect tax swaps to become increasingly difficult to execute as year-end approaches due to bond market volatility and Y2K considerations.

Bondholders should not miss this opportunity to establish losses and reduce or eliminate capital gains taxes.

If you are interested in finding out if there is an appropriate swap for you, list your bonds in the spaces provided below.

Make sure you include your unit cost on each issue.

With no obligation, we will attempt to propose a tax swap that makes sense for you.

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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.

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A TAX SWAP SAVES REAL DOLLARS

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