Investment Strategy

Which the new laws just made more difficult by requiring lot specification at the time of sale, not at the end of the year. The laws are another move towards socialization - restriction of individual freedoms- but no one seems to notice, or care.

Reply to
dapperdobbs
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Remember your "individual freedoms" ends at my nose, ears, or eyes. I would rather be a nation of laws than yahoos.

Chip

Reply to
Chip Wood

Excuse me?

Reply to
dapperdobbs

On Mar 1, 11:45 am, Ron Peterson wrote: [snipping stuff that I do not quite agree with but is of little consequence at this point]

I think the above is one of the linchpins of this discussion. It seems to me the reason Hank was able to do what he did with the mortgage and stocks and probably sleep fine at night is that he already had an emergency fund. Namely, his general high wealth.

I think I would just add my opinion that, with a large and diversified portfolio and when a cash need arises, I suggest selling that which seems overpriced or already has a nice gain. Though with an eye towards cap gains and taxes, too.

Reply to
Elle

Welcome back (sorry for my error).

The above is a major thing when investing in large caps. Ben Graham puts stress on the notion that one makes decisions about which are worthwhile companies based on careful analysis, then judges "Mr. Market" for his mood swings.

Reply to
dapperdobbs

As your post illustrates, the new regs came about because so many people are either ignorant of the law in this area, or simply don't comply with it. It's meant to restrict one individual freedom: the freedom to fill out a tax return in a way that under-reports your tax!

You can't pick your specific-ID sale lots at the end of the year, based on "what looks good." The identification has to be "at the time of the sale or transfer," and documented on a written confirmation within a reasonable time after. The Federal Register notice about the new regs show that they - rather than representing new law about specific-ID - are consistent with a very old interpretation, from 1967:

"Some commentators recommended that taxpayers should be allowed to wait to identify stock until the settlement date or until the end of the year. Other commentators opined that post-sale changes to specific identification of stock should not be allowed.

Rev. Rul. 67-436, 1967-2 C.B. 266, holds that an identification of stock by the time of delivery, which was within four days of the sale date, complied with the requirement to identify stock at the time of the sale or transfer. Consistent with Rev. Rul. 67-436, the proposed regulations provide that a taxpayer makes an adequate identification of stock at the time of sale, transfer, delivery, or distribution if the taxpayer identifies the stock no later than the earlier of the settlement date or the time for settlement under Securities and Exchange Commission regulations. Rev. Rul. 67-436 will be obsoleted when these regulations are published as final regulations."

-Tad

Reply to
Tad Borek

There was no change at all. You have been required to specify lots at time of sale for decades. If you've been matching things up at the end of the year you did it wrong, the specific ID is invalid, and you defaulted to using FIFO. Go amend your returns :).

See IRS Publication 550 as far back as you care to look, as well as the relevant IRS regulations.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

Do you have a link to your reference, please?

The issue isn't the determination of basis, but the time the basis is determined. Deferring tax is applicable in 2011 as well as previous years, but in some years it makes sense to elect to sell the lower basis. Both are consistent with the earlier laws which provided the option of income averaging so that a payer selling everything in 2000 before the crash doesn't get slapped for income ten times the previous or succeeding two years.

I tried searching the Federal Register, and failed to come up with anything other than some non-applicable regulations for swaps. I did re-read pub 550 for 2010 - I can't quote the whole thing to show I failed to find anything at all that specified a time of determining basis, but give me another couple of shots and I'll have parts of it memorized. A basis is a basis, and the capital gain is paid on sale. Taxes are computed and paid on the gain. Again, it is not the (determination of) basis, but the time the basis is determined that, until I read otherwise, I will contend has changed.

Options reporting has also changed (for brokers), but I always report that. I'm surprised not to have seen a reference to "leaps" - a capital asset held more than a year, such as a long call, would be long-term. I wish I'd 'commentated' that long put is a capital asset, not a short sale.

I disagree with the IRS Commisioner's politically facile remark (below) that most will welcome the new paperwork regulations, and I feel sorry for retailers required to segregate and report credit card sales - I wonder if that will impact the issuers and processors.

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links to IRS Bulletin 2010-47, 11/22/10

under "supplementary information" "Summary of Comments and Explanation of Revisions" "2. Basis Determination - Average Basis Method" "e. Change in Method of Accounting"

I found this:

"The final regulations provide rules governing the time and manner of electing or changing from the average basis method, determining the basis of stock following a change between the average basis method and a cost basis method, and identifying stock sold. The regulations permit taxpayers to elect or change from the average basis method at any time during a taxable year and to choose a method to identify stock sold on a sale-by-sale basis."

link to talk:

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"3835,00.html"The second tool Congress gave us imposes basis reporting requirementsfor publicly traded securities. Under current law, a broker isrequired to file with the IRS annual information returns generallyshowing only a customer's gross proceeds from certain transactions.The same information is furnished to taxpayers to help them fileaccurate and complete returns. "Here's the problem. GAO estimates that as many as seven million taxpayers ? more than one in three who sold securities ? may have misreported capital gains and losses. And around half of them did so because they misreported their basis.

"This new provision ? effective January 1, 2011 ? will go a long way to reducing this problem and making things easier for investors. I don't know about you, but I have spent far too much time digging through old records, trying to find the basis for securities I sold. I think investors?and I count myself one ?will welcome getting this new, easy-to-understand information from their brokers."

Reply to
dapperdobbs

Here's one:

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That page says it was last modified in May, 2005, so it is showing the reg as it existed almost six years ago (so well before the law change you are complaining about).

Note specifically 1.1012-1(c)(3):

(3) Identification on confirmation document. (i) Where the stock is left in the custody of a broker or other agent, an adequate identification is made if? (a) AT THE TIME OF SALE OR TRANSFER, the taxpayer specifies to such broker or other agent having custody of the stock the particular stock to be sold or transferred, and (b) Within a reasonable time thereafter, confirmation of such specification is set forth in a written document from such broker or other agent. Stock identified pursuant to this subdivision is the stock sold or transferred by the taxpayer, even though stock certificates from a different lot are delivered to the taxpayer's transferee.

Which is at time of sale and has been at time of sale for decades.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

Here's another -- the 1994 version (as far back as I could find on the IRS's website) of Publication 550:

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Please see page 44:

Identification. You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent.

If you have left the stock certificates with your broker or other agent, an adequate identification is made if you: 1) Tell your broker or other agent the particular stock to be sold or transferred AT THE TIME OF THE SALE OR TRANSFER, and 2) Receive a written confirmation of this from your broker or other agent within a reasonable time.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Reply to
Rich Carreiro

The regulation that spells out which stock/mutual fund lots you're assumed to have sold, when you own multiple lots and only sell some of them, is 1.1012-1 Basis of property. Google should turn that up somewhere and the IRS publications telling you how to report stock/fund trades (550, 551) mirror its language.

That regulation dates back to 1957, and the oft-cited revenue ruling that speaks of the settlement date was from 1967. Again, in my experience these rules are not commonly known, even by brokers, even though all of it is spelled out in the IRS Publications.

That regulation also allows for average cost, but only with mutual funds. Oddly, the new regs extended this to most dividend reinvestment plans as well.

As evidenced by this thread!

-Tad

Reply to
Tad Borek

See, I was right - this IS a great country! Kennedy knew that when he spent his personal funds and time keeping the Bureau in business during Prohibition.

Thank you for the links and quotes, I appreciate it. There were three instances over the past 20 years where end-of-year made a difference (more fun imagining than the reality). If I defaulted to FIFO it would make about a 3% difference in taxes deferred (which were paid up on subsequent sales), and the interest on that over the time isn't a significant number. It bothers me that I missed it and had to be corrected, but it does look like you're 100% right. Thank you for upping my game a notch.

Reply to
dapperdobbs

Thank you for that reference.

I agree and have personal experience with that.

[snip]

The new 1099 regulations on small businesses are much, much worse than what we've been discussing, and Congress is apparently going to repeal that.

Reply to
dapperdobbs

Agree, and I'm confident they'll be repealed before they come effective. I'd be hit by them and it would be a huge pain in the neck with zero effect on tax collections.

This basis one is a big work-saver for investors, albeit at the "expense" of no longer being able to use fictitious cost basis (which of course is the whole point). I've been tracking basis as a service for clients for years and it's an accounting headache. The brokers' back-office systems didn't deal with some issues very well (e.g. specific ID mutual fund sales, cash in lieu received in spin-offs, step-up). Their systems have been beefed up substantially over the past

6 months. I don't know how much of that is trickling over to retail but on the institutional side we can designate a default tax-accounting standing instruction for each account like "minimize capital gains" and the lot-reviewing software figures out how to accomplish that, and stamps the trade ticket accordingly.

The downside is, now that it's being tracked and reported to the IRS we now have potential fights with our custodians about what the real cost basis is, in particular that "average cost" has been assumed by the back-office systems even when fund trades were stamped with lot dates. And use of FIFO with fund sales is only evidenced by the tax return, which the fund custodian has no knowledge of. I mention this one because I believe it was an issue with The Vanguard Group, based on client feedback (I don't know, don't custody there).

-Tad

Reply to
Tad Borek

Yes, there are "critical mass" points in portfolio size that allow diversifying out of mutual funds and their expenses into working with individual securities. And yes, I went into retirement ten years ago after having built taxable account and IRA portfolios into something I could draw 4%/yr from to meet my cash flow needs. The numbers aren't "wealth" as the "Wealth Managers" define it.

Questions I've had to answer for other family members in recent years have involved starting with portfolios of $10K, $50K, and $100K. In responding to you, I'm thinking a portfolio between $10K and $50K. You've told us that you have $20K free cash, a $45K 4.25% mortgage, and $300/mo cash surplus to apply to some combination of mortgage and investments, with a goal of paying off the mortgage entirely in some near term.

Since using the $20K of cash to do a paydown on the mortgage will leave you still $25K in debt on it, my suggestion was to put $10K into the mortgage balance, and invest the other $10K in suitable "widows and orphans" lower risk dividend-paying securities, for a much better return than you'll get from CD's today.

I took a quick look at amortization of a $45K 4.25% loan over 60 months, using the calculator at

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It tells that payments of $833.33 will pay off the loan in 60 months. Applying $10K to that note advances you about 15 months; and applying $20K advances you about 30 months. At best that leaves you 2-1/2 years of $833.33 payments to clear the note. $10K leaves you 45 months at $833.33/month, with $10K that you can add to your current investment portfolio. I'll assume a low number ($10K) for the four blue-chip stocks you say you currently have.

Where to invest $10K in a new portfolio? I'd look at some of the closed-end bond funds. Ferinstances are the Van Kampen family, particularly their investment-grade munis like VGM and VIM, their taxable fund VBF; and Western Assets taxable investment-grade bond funds like IGI and PAI. Figure on about $5K put in those or similar investments. They are all paying 5% or better (VGM is paying 8.20% tax-exempt). I think all of those are selling at a good discount right now. You can find others at

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The other $5K I'd sit on right now, and start watching prices on REITS like Realty Income (O) and Liberty Realty (LRY). Also telecoms like AT&T (T) and Verizon (VZ). They may be overbought/overpriced today, but are likely to come down at some point this year.

Those are simply "ferinstances," for you to look at and evaluate for suitability for your portfolio. Two things are for sure:

  1. What you do buy is "you bought it/you own it."
  2. There is a very high probability that at least one that you buy will go down in market price rather significantly at some point this year. Don't plan on "winning them all."

I said, at the outset, that I began investing in securities in 1957. So I've ridden out the bear markets of 1957-58, 1960-62, 1973-75, the quickie "crash" in 1987, 1994-95, 2001-2003, and 2008-2009. I've long since learned how to open a monthly statement and look at a number that is a lot lower than last month's. Those are buying opportunities. Get that experience. That is what will teach you when to buy, and when to harvest profits.

As the old song goes, in a bear market, "Mr. Herbert Hoover says 'Now's the time to buy.'" People who bought in 1932-33 made money by the fistfull. I knew several in my younger days.

I think if you invest $10K of your cash this year, that sometime over the next 45 months, you'll be able to harvest enough profit to pay off the mortgage without damaging a growing portfolio.

Hank

Reply to
Hank

*may* be deductible. If the person is itemizing regardless of the mortgage interest, it's usually deductible in its entirety. However if the person's other deductions (state income taxes, etc) don't add up to more than their standard deduction, than some or all of the mortgage interest won't increase that deduction.

Overall, most Americans actually *don't* itemize. Naturally, folks involved in these kinds of financial planning and investment conversations - more likely to be make a greater than average incomes here - are more likely to itemize. But the proportion may still be somewhat surprising.

Bear in mind that you may then have two very different kinds of potential interest deductions. The interest on the mortgage on the primary residence may be deductible on your standard Schedule A (like any homeowner's, subject to the stuff noted above), but the interest on the rental property itself would be deductible against gross income from the rental property (ie. deductible against the rent) on your Schedule E (the tax form for rental property).

Reply to
BreadWithSpam

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Reply to
jenesabby

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