I have a few CMOS and Fannie mae investments that often give a return a capital. I am using Q5. When I use the return of capital transaction it seems to lower my cost, but leaves the Market Value the same. This leads to inaccurate gain/loss figures. I can change the Price to adjust the Value, but the this leads to inaccurate results also. Can anyone explain how to enter this type of transaction.
Thanks,
dj
On Tue 25 Oct 2005 07:23:51p, Don James wrote in news: snipped-for-privacy@accessus.net:
Return of capital is supposed to lower your cost basis. "Return of capital" means that some of your original purchase price (cost) was returned to you during this tax year. If you are then re-adjusting costs, you are the one making them inaccurate.
Also: if at year end, you see any portion of your distributions for the year re-characterized as non-taxable, you are supposed to handle these also as return of capital (which then also lowers your cost).
You enter a return of capital as a RtrnCap transaction. It does exactly what it is supposed to: lower the cost and keep the market value the same. This is so you will have accurate gain/loss figures.
To use an example, if you invested $10,000 in something that is now worth $15,000, then get a $1,000 ROC, it needs to be accounted for. The ROC itself is not taxable, but you now have only $9,000 of your own money invested. If you sold the investment the next day for $15,000, your gain would be $6,000, because you invested $10,000 and got $16,000 back. That's why the cost base is reduced with each ROC transaction.
I have a stock which typically reclassifies its dividends at the end of the year, showing part of them as a return of capital. When I go back and change the dividends from Div to RtrnCap, it shows the cash balance in the account still increasing and the cost basis decreasing. This is as it should be. I don't see why it should handle returns from Fannie Mae or CMO's differently.
Jim
FWIW, found this comment relating to ROC and cost basis:
"If the basis would be reduced to less than zero, reduce only to zero and treat any return of capital which exceeds the zero basis as (in all liklihood) long term gain and report on schedule D."
Thanks for the replies. Fred, I understand your example, but let me give you one that is closer to what I have seen: A $5000 investment is made in a FNMA 6% note. At the end of 6 months this note has returned $81.40 in interest and $4897.04 as return of capital. According to Quicken this note still has a market value of $5000.00 and, using your example I could sell this note for $5000.00. So that gives me 81.40 in interest+ $4897.04 of my money back + a note I could sell for $5000.00. A $5000 investment worth $9978.44 in just 6 months? That just doesn't sound quite right to me.
It doesn't sound right to me, but it's your data. You said you invested $5000.00. You received back $81.40 interest + $4897.04 return of capital + $5000.00 from the sale of the note. That's $9978.44 returned from a $5000.00 investment.
My bet is that you don't have the correct market price for the note. Remember, Quicken does not update bond prices -- you have to do that manually. Quicken will only report the last price it has, which is likely the purchase price of
100.Sorry Fred, I was not too clear. I am not saying that I was able to sell that note for $5000, only that according to the market vale in Q and subbing my numbers for the $15,000 market value in your example that I could sell it. According to the monthly brokerage statements the price never varied more the +/- a buck or two over the 7 months I owned it.
I realize that, but it's the current market value which is throwing your calculations out of whack. All rate of return calculations assume you sell your security for the current market value. That's why you are getting the returns you are. As I said, I think your market value is wrong, but only you can determine that.
Yeah, I agree 100% I think the current market value is wrong also, that is my whole point. I could be wrong here, I'm not a financial guru, But I kind of think of the return of capital as if the note issuer purchased a part of the note back from me. In my example if I get a return of capital of $1000.00 it is like the issuer "bought" $1000 of my $5000 investment, leaving me with $4000 still invested and $1000 cash. Quicken will reduce my cost basis to $4000 but leave the current market value at $5000 and then tell me I have a 20% gain. It seems to me that there is no gain at all.
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