ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, March 18, 1996 TAG: 9603190012
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: TAX QUESTIONS
Q: During 1995 I purchased a substantial volume of bonds. In order to complete my federal tax return, I need answers to the following questions:
On what form or schedule and line do I account for accrued interest due the seller at the date of purchase?
On what form/schedule and line do I account for any premium paid on the bonds? May I take a credit for the entire premium this year, do I have to wait until the bonds are redeemed, or can this amount be amortized? If so, for what period?
On what form/schedule and line do I account for broker fees and service charges?
A: When bonds are sold between interest dates, part of the purchase price represents interest accrued to the date of the sale.
For taxable bonds, the purchaser reports the total interest payments as taxable interest on line 1 of Schedule B (Form 1040), Interest and Dividend Income. The accrued interest should be reported as a negative number on a separate line of Schedule B and subtracted from the interest income reported on line 1.
Accrued interest on nontaxable bonds (e.g. municipal bonds) is not deductible and would simply reduce the nontaxable interest reported on line 8b of Schedule B.
Your second question regarding premiums on bonds is more complicated. Your choices regarding the treatment of bond premium depend on whether the bonds are taxable or nontaxable.
You are required to amortize the premium on a tax-exempt bond. This amortized amount is not deductible in determining taxable income. However, each year you must reduce your basis in the bond by the amortization for the year. You would use the resulting adjusted basis in the tax-exempt bond to figure your gain or loss on the sale or redemption of the bond.
If you purchase a bond which yields taxable interest, you can either choose to amortize the premium or add the premium to the basis of the bond. If you simply treat the premium as part of your bond basis, then there's no tax effect until the bond is redeemed or sold.
If you choose to amortize the bond premium, then you can offset your interest income from the bond by the annual amount of amortized bond premium. If the bonds were originally issued after Sept. 27,1985, then you must amortize bond premium using the "constant yield method" on the basis of the bond's yield to maturity.
You choose to amortize the premium on taxable bonds by reporting the offsetting amortized bond premium on your income tax return for the first tax year for which you want the choice to apply. You must attach a statement to your return showing how you figured your offset amount. The choice is binding for the year you make it and later tax years. It applies to all similar bonds you own in the year you make the election and also to those you acquire in later years. You can change your decision to amortize bond premium only with the written approval of the IRS.
The amortized bond premium is offset against the interest income of the bond. Offset your interest income from a bond by reporting the bond's interest on line 1 of Schedule B (Form 1040). Several lines above line 2, put a subtotal of all interest listed on line 1. Below this subtotal, write "ABP Adjustment," and the amount. Subtract this amount from the subtotal and enter the result on line 2.
You also reduce the basis of the bond by the amount of the amortized premium.
Regarding your third question, you cannot deduct broker fees or charges incurred to purchase bonds. You must add the fees and charges to the cost of the security. You can deduct fees you pay a broker to collect income from a taxable bond as a miscellaneous itemized deduction on Schedule A (Form 1040).
-Answered by Stan Boatwright of Lucas & Boatwright
Q: In January 1995, my husband and I purchased a piece of land. We paid some down and borrowed the balance with an installment loan to be paid over 15 years.
Can I deduct the amount of interest on the loan on our property? We do plan to build a home in the future, but not within the next few years. We are also paying the mortgage on the home we live in currently.
The property is undeveloped rural property with no sewer or water but did pass the required perk test.
A: Personal interest is no longer deductible. The only types of interest that are deductible are trade or business, investment, passive activity and qualified residence interest. The land is clearly not a trade or business asset or an asset used in a passive activity. Therefore, we will examine investment and qualified residence interest.
Investment interest expense is interest on proceeds borrowed for the purpose of making investments. Property held for investment includes property producing portfolio income, of which an example is gain from the disposition of investment property. This description includes land if it is held for investment.
Generally, you can claim a deduction for investment interest expense up to the amount of your net investment income. This is investment income reduced by investment expenses deducted as a miscellaneous itemized deduction on Schedule A. Any amount not used can be carried over to subsequent years.
Investment income includes gross income from properties held for investment such as interest, dividends, annuities, royalties and net short-term capital gain from the sale of investments.
Net long-term capital gain from the disposition of investment property is not included in investment income unless an election is made to reduce capital gain that is eligible for the 28 percent maximum capital gains rate by the same amount. The deductible portion of investment interest expense is calculated on Form 4952.
The question hinges on whether the land is investment property. Property held for investment does not include property acquired for personal use. Therefore, you need to carefully examine and document your motives for purchasing the property.
The other alternative is to convert the loan to home equity indebtedness secured by your personal residence. In order for the interest to be deductible, the total home equity loan cannot exceed the lesser of $100,000 or the amount by which the fair market value of your house exceeds any indebtedness incurred to purchase or improve your home.
Because interest on two residences can be deducted, you may want to consider converting the property to a qualified residence by placing a mobile home or house trailer with sleeping space and toilet and cooking facilities on the property.
-Answered by Wendy S. Funderburk of Spencer & Associates
LENGTH: Long : 119 linesby CNB