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Bond Swapping

How you may offset gains through tax-loss harvesting.
Bond swapping is selling a bond and simultaneously buying a similar bond to benefit your portfolio

Alamo Capital’s CEO: Nancy Mullally discusses Bond Swapping




Why would I want to swap bonds?


The benefits of Bond Swapping may include:

– Modifying quality / credit rating
– Modifying yield
– Modifying price
– Modifying call protection

– Protecting a gain
– Protecting a loss
– Tax-Loss Harvesting to offset gains (for tax purposes)
– Taking advantage of changes in the yield curve (interest rate market)

Items to take into consideration:

A wash-sale violation involves buying back a substantially similar security within 30 days effectively negating the realized capital loss for tax purposes.

You can avoid a wash-sale by changing at least 2 out of 3 of the following security characteristics:

– The issuer / name of the security
– The coupon / interest rate paid
– The maturity / life of bond

Short-term losses can only offset short term gains and they are taxed as ordinary income. A short-term bond is defined as having been held for less than 12 months.
Long-term losses can only offset long term gains and are subject to any associated long-term taxes. A long-term bond is defined as having been held for more than 12 months.

Example* of Tax-Loss Harvesting using Bond-Swapping:

Sue has 100m bonds she purchased at par (100% or $1,000 each) totaling $100,000. These 100 bonds are currently worth 95 totaling $95,000. As a result, Sue has a loss of $5,000 within her bond portfolio.

In Sue’s stock portfolio, she purchased 500 shares of company Y at $40, totaling $20,000. Sue later sold the same shares of company Y at $50, totaling $25,000. Sue experienced a $5,000 gain.

To use “Bond Swapping” to benefit her portfolio, Sue can sell the bonds which are currently worth $5,000 less than the original purchase price of $100,000, realizing the loss. Then Sue purchases similar bonds at 95–maintaining the same price for this particular scenario–making sure 2 of the 3 characteristics change. Effectively, Sue just: 1) performed a bond swap 2) realized a tax-loss which offsets the stock gain and 3) all without compromising her portfolio.

* NOTE there are many bond-swapping techniques that may benefit a portfolio under different circumstances. Contact a broker today for a FREE consultation of your individual investment portfolio.

IMPORTANT: IRS rules limit the amount of deductions that can be taken and/or offset, and gains and losses must both occur in the same calendar year. However, carry-forward losses may also be available. Losses in a qualified or retirement account may not be used. The information provided here relates only to investment advice and does not replace or serve as professional tax advice. Please consult a qualified tax advisor regarding any questions you may have, as tax implications and benefits vary.

Interested in Bond Swapping?
Click here to download the Bond Swapping Appraisal form (seen below) and fill out the contact form above to start bond swapping today.


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