| Take capital loss in taxable account and buy in IRA? |
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maximboxer
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| Take capital loss in taxable account and buy in IRA? |
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Hi, I'm trying to make the best of the bad market and am thinking about selling mutual funds that have capital losses, transfering the funds to my wife's and my IRA's and purchasing the same or similar mutual fund (we haven't funded our IRA's yet this year). Hopefully this would allow me to take the tax deduction against my income (no capital gains to offset unfortunately), avoid the 1-month rule on buying the same fund, and stay in the market while not realizing any true loss. Can you help me understand if this is within tax codes? Can I buy the same fund or must it be substantially different? Does the capital loss count against income? Does it have to be long term? Any help and guidance on this would be greatly appreciated! Thanks.
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Wed Oct 08, 2008 2:04 am |
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BlankenshipFP
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coaster's right - back in the olden days (prior to December 2007) the IRA loophole for wash sales existed, but it has now been closed, per Rev Ruling 2008-5 and 2008-3.
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Also, just so you know, it doesn't matter if you make the sale in your wife's account and a subsequent purchase in your own account - still covered by the wash sale rule as "controlled" by the same people.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Wed Oct 08, 2008 1:41 pm |
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efflandt
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It is not really clear how IRB 2008-3, Rev. Rule 2008-5 applies to an IRA since buying or selling within the IRA has no tax implications at that time.
In the example cited, the bonds never left control of the person transferring them to a trust, so it might violate some rule about selling something you own or control to your own trust (you cannot do that with an IRA):
quote:
In Security First National Bank of Los Angeles, 28 BTA 289 (1933), the taxpayer sold bonds (at a market price) to a corporation of which the taxpayer was the sole shareholder. On the same day, in exchange for land, the corporation transferred the same bonds at the same price to a trust over which the taxpayer had absolute dominion and control. In finding that § 214(a)(5), the predecessor to § 1091(a), applied to disallow the loss, the court reasoned as follows:
The [taxpayer] did not personally reacquire substantially identical property and, strictly construed, the language of section 214(a)(5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. ... Although title to the bonds was acquired by the trust, actual command over the property was still in the [taxpayer]. ...The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214(a)(5) is concerned.
Security First National Bank, 28 BTA at 314 - 315.
See http://www.irs.gov/irb/2008-03_IRB/ar08.html
But to be on the safe side waiting a month before repurchase would avoid any wash sale rules. A different, but similar fund would also avoid that.
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Wed Oct 08, 2008 11:30 pm |
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maximboxer
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Coaster is right, the IRS rules are more complicated to understand than I originally thought. To answer your original question, I don't "need" to take advantage of the tax deduction to reduce taxable income, but I do want to put money into my IRA (but only have my taxable mutual funds available to do so as all my other investment money is going into my Thrift Savings Account), stay in similar funds, and if possible take advantage of any tax savings possible.
When you say I can avoid the wash rule by buying a similar but different fund, does that mean I can sell a Fidelity S&P 500 index fund and buy a Vanguard S&P 500 index, or must it track a different index (like Wilcox 5000)? As you can see, I like index funds.
Thanks again for all the help!
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Thu Oct 09, 2008 11:43 pm |
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BlankenshipFP
Money Talk Advisor
Cash: $ 79.56
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Location: Illinois
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To efflandt's post: I agree, it's not immediately clear why the ruling impacts an IRA when you focus on the tax implications. What's at stake here is the "control" issue, which ultimately affects the tax implication.
The situation is that a taxpayer is disallowed a tax deduction when the asset is purchased 30 days before or after the sale, by the taxpayer or for the benefit of the taxpayer. Otherwise, the taxpayer could sell items to his IRA at a loss and take the tax deduction, then ultimately re-sell it at a gain later within the IRA.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Fri Oct 10, 2008 12:53 pm |
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