Municipal Bond Forum
Coming out ahead on a swap
Q
In your article, “When Flexibility Counts“, you discuss how munis can be used in a tax swap. But isn’t the tax “advantage” neutral (other than a slight timing play)? You can take a capital loss by exchanging bonds that are down, but wouldn’t it be offset by the capital gain incurred when the new bonds are ultimately redeemed or sold?
A
James A. Klotz responds:
Regarding the “timing play” you mention: The replacement bonds in our “swap” illustration would have had long term maturities (20 to 30 years). It is always advantageous to defer taxes to a later date rather than paying them in current dollars. If, however, an investor passes before the bonds mature, they are inherited by the beneficiaries with a new “date of death” cost basis. Had this occurred any time during the last 10 to 20 years, there would likely be no tax due at maturity.
This is why we encourage investors of every age – young and old – to buy long-term bonds: Maximize income during your lifetime! Should you pass, the bonds are treated as cash in your estate. It’s a winner for you and your beneficiaries.
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