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Dear Liz: Your tax expert’s answer to a person who wanted to roll over a $30,000 capital gain on a mutual fund missed an important point. Since the couple were solidly in the 15% tax bracket with a taxable income under $72,000, they should qualify for the 0% federal capital gain tax rate. (They may, of course, owe state taxes.)

Answer: They may not have had a capital gain at all, as other tax pros have pointed out. When people own mutual funds, the earnings are often reinvested each year. If the couple paid taxes on those earnings, their basis in the mutual fund would increase each year. To know if the couple had any capital gain, we’d need to know that adjusted tax basis. In any case, the original answer — that you can’t roll over the gain on a mutual fund into another investment to avoid capital gains taxes — still stands.

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6 Comments

1

Hi, Liz.

At some point, could you talk a little about this reinvestment of earnings and the mechanism for adjusting the basis of the mutual fund?

2

Liz, I learn so much from reading your column. As Tena above requested, please do talk more about this issue of adjusting one\’s basis through the yearly payment of taxes.

3

I would like to know how an elderly condo owner can qualify for a reverse mortgage in Florida when the mortgage was paid off in the early 90′s, but the association has never applied for FHA approval. Does this automatically disqualify the owner under such circumstances?
Thank you

4

My best advice is to find a good tax pro (an EA or CPA). As with estate planning, it\’s complex and you don\’t know what you don\’t know; mistakes can be expensive.

5

Tena,
At the end of each year you got (or should have)a year end statement from each mutual fund you invested in showing the amount of dividends, long/short term capital gains paid out. And, most importantly, if these monies were reinvested in additional shares of the mutual fund. If you reinvested these monies, then you add this amount to your original basis (the amount you initially paid for the shares) because you should have paid taxes on these monies for the years they were received in.

For example: You buy 100 shares of XYZ for $1000 in 2010. You sell all of your shares in 2014 for $2000. You have a $1000 long term capital gain…..maybe.
In both 2011 and 2012 the shares paid out $250 and $250 in dividends which you had reinvested to buy more shares. So, your basis is $1500 and your net long term capital gain is $500.

6

Helga, a HUD-approved housing counselor should be able to let you know your alternatives. You can find one at http://www.hud.gov.