Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 27, 1995 TAG: 9503270015
SECTION: BUSINESS PAGE: A10 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
A: The fund returned principal to you because it was invested in Ginnie Maes, which are pools of mortgages on which homeowners pay both principal and interest. That type of investment returns principal and interest from the underlying mortgages, creating a reinvestment problem for those who buy them. Your mutual fund probably chose those investments in order to boost its yield above what Treasuries return, and they are government related. Many so-called government funds do the same.
A lot depends on what the prospectus for the fund said at the time you invested. If you did not read the prospectus, you are not alone. But if the fund made that disclosure in its prospectus, which you should have received before investing, you probably have no grounds for a dispute with the fund.
If the prospectus did not disclose the investment in Ginnie Maes, you can seek arbitration. You should let your broker guide you in seeking a remedy.
Bond funds have suffered because interest rates are rising. They will recover their value once interest rates fall again, but that could be a long time in the future.
Help with budgeting
Q: I am 37 years old, single and with no dependents. I've always had problems budgeting and managing my money.
Please outline a weekly or monthly budget plan for me. I bring home $350 a week, and my rent is $340 a month. Would it be nice to have a savings and checking account? How about retirement investments?
A: Virginia Garretson of Consumer Credit Counseling in Roanoke said your rent is in line with your income.
She said her nonprofit agency, which helps people to plan and manage their finances, can help you even though you live a considerable distance from Roanoke. She said you should write to request budget forms which you can fill out and return to the agency for evaluation and assistance. The agency has budget forms that allocate various living expenses by percentage of income. The agency's budget plans provide for savings.
You should write to Consumer Credit Counseling at 7000 Peters Creek Road, Roanoke 24019.
Capital gains tax
Q: Early last year, I sold a lot that I'd owned for five years. I paid $22,000 for the land originally and sold it for $30,000 last spring. The buyer made a down payment of $7,000, and I assumed a note for the remainder at 8 percent over five years with monthly payments of principal and interest. After paying the real estate commission of 10 percent, I received $4,000 at closing.
Am I subject to capital gains tax on this sale and, if so, what portion? Is it owed for last year or over the life of the loan? Also, do I report interest as income on my tax return?
A: You are subject to capital gains tax on the sale of your lot, and the interest you receive on the note also is taxable income, according to William R. Brumfield Jr., a certified public accountant with the Roanoke firm of Foti, Flynn, Lowen & Co.
He said it is normally advantageous to report income on an installment sale on Internal Revenue Service Form 6252 and report the gain as you collect the principal.
Your total gain is $5,000, computed by subtracting from the $30,000 sales price your $22,000 cost plus $3,000 sales commission.
Brumfield said your taxable capital gain for each year will be the principal collected divided by $30,000 times the $5,000 total gain.
As an example, he said, suppose you received $500 in note principal collections and the $7,000 down payment in 1994. Your gain would be $1,250 (7,500 / 30,000 x 5,000) for 1994.
The total down payment is considered a principal collection in the year of sale even though a $3,000 commission was deducted out of it, Brumfield said.
by CNB