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Tax free exchange of mutual funds RRS feed

  • Question

  • I was recently able to make a tax free exchange of a mutual fund Standard shares to Institutional ones in my taxable investment account.  By good luck, at the time of the exchange, the share value of the two funds were identical so the number of shares in and out are identical.  But how do I record this in Money? If I add a new institutional fund and do Sell/Buy transaction, my cost basis will be wrong.  But I can't just change the name (and symbol) of the fund because I still have Standard shares in my IRA account and I need to have both Mutual Funds in my portfolio listing.  Any suggestions how, in essence, I make two funds out of one?
    Saturday, May 16, 2015 8:07 PM

Answers

  • To start with, note that the "new" tax basis for the two investments must equal the basis of the original investment (call this value OB).  (That's why it's called tax free.)  Unless something happened after you bought the shares originally (such as a return of capital distribution), this original basis will be your total cost (shares, commissions, fees, etc) when you bought them.

    Compute the total value of each investment as the closing price of that investment on the day of the transaction times the number of shares you have in that investment after the transaction (call these values TV1 for the original and TV2 for the new investments).

    The new basis in the original investment (B1) is OB * TV1 / (TV1+TV2) and in the new investment (B2) is OB * TV2 / (TV1+TVC2).  Obviously B1 + B2 = OB and this satisfies the tax free definition.

    My preference is to generate two transactions for the original investment.  One is a Return of Capital for B2.  The second is a Remove Shares to get the quantity down to the correct current value.  Neither transaction generates a taxable event.  Then generate a normal Buy transaction for the correct quantity of the second investment for a total cost of B2.  (Money will then generate a price per share value which will have no relationship to the current price but that's OK because you are not paying the current price.)

    This should result in Money having the correct basis and quantity for both investments.

    • Marked as answer by bobjbkln Monday, May 18, 2015 6:02 PM
    Sunday, May 17, 2015 4:26 AM

All replies

  • To start with, note that the "new" tax basis for the two investments must equal the basis of the original investment (call this value OB).  (That's why it's called tax free.)  Unless something happened after you bought the shares originally (such as a return of capital distribution), this original basis will be your total cost (shares, commissions, fees, etc) when you bought them.

    Compute the total value of each investment as the closing price of that investment on the day of the transaction times the number of shares you have in that investment after the transaction (call these values TV1 for the original and TV2 for the new investments).

    The new basis in the original investment (B1) is OB * TV1 / (TV1+TV2) and in the new investment (B2) is OB * TV2 / (TV1+TVC2).  Obviously B1 + B2 = OB and this satisfies the tax free definition.

    My preference is to generate two transactions for the original investment.  One is a Return of Capital for B2.  The second is a Remove Shares to get the quantity down to the correct current value.  Neither transaction generates a taxable event.  Then generate a normal Buy transaction for the correct quantity of the second investment for a total cost of B2.  (Money will then generate a price per share value which will have no relationship to the current price but that's OK because you are not paying the current price.)

    This should result in Money having the correct basis and quantity for both investments.

    • Marked as answer by bobjbkln Monday, May 18, 2015 6:02 PM
    Sunday, May 17, 2015 4:26 AM
  • Thank you for your response, let me give you more details and ask a few questions.

    This is/was a mutual fund with dividend reinvestment and the number and value of shares of the original investment in this Account after this exchange is ZERO.  The shares of the original investment that I still own are in a separate account.  Therefore I assume that what you call original basis of the new investment is 100% of what Money calls Cost Basis of the old investment.

    So then I do a remove shares (all) from the original investment, do an ROC in the new investment equal to the Cost Basis of the original investment, and then do a Buy of the number of shares in the new investment using the Cost Basis as my Total.

    Lastly, I do a Price Update in the new investment to get the correct Market Value and net appreciation.


    • Edited by bobjbkln Sunday, May 17, 2015 7:41 PM
    Sunday, May 17, 2015 7:40 PM
  • There is no original basis in the new investment.  The original basis applies to the old investment (and perhaps original is the wrong adjective).  The original basis is the actual basis of the old investment just prior to the transaction that resulted in a reduced quantity of the original investment and an increased quantity of the new investment.  The original basis is frequently the same as the cost basis but only if no other event has caused it to change.  Some typical events that do cause a change are a return of capital distribution, a dividend distribution that gets reinvested, and a stock distribution.

    I've never seen a tax free transaction on a taxable investment that involved changing accounts.  But that just proves my experience is limited.  You could do a Remove Shares transaction (for all the shares) and a Return of Capital transaction (for OB dollars) to zero out the old investment account.  Then you would need to transfer the OB dollars from the cash account associated with the old investment account to the cash account associated with the separate investment account.  Then in the separate account you can enter a buy transaction for the appropriate share quantity of the original investment with a total cost of B1 dollars and a second buy for the appropriate quantity of shares in the new investment with a total cost of B2 dollars. 

    Be aware that for one year Money will mistakenly characterize any future sales transaction of the original investment as short-term.  Since you did not actually buy and sell any shares, the original purchase date of the shares of the original investment is what determines long- and short-term, not the date you create this "artificial" buy of the remaining shares.

    Sunday, May 17, 2015 11:48 PM
  • If your mutual fund is involved in a tax-free reorganization, I.E., your
    "B" shares are being converted to [fewer generally] "A" shares, or
    a there is a tax-free merger where you don't originally hold both
    funds:

    1.  Do an appropriate split of the fund.  You will need to input
    the split ratio as a ratio of integers (1 ...  65535).  Post the
    ratio you want to achieve.

    2. In the investment details, change the symbol.

    3. Change the investment name.

    4. Add a brief comment to the investment to explain the change.

    This does not handle the case where only part of your shares are
    converting.  (You got sold again, did you?  Think no-load next
    time.)

    Monday, May 18, 2015 12:55 PM
    Moderator
  • I will try to be clearer in describing the situation and why I ended up using a modified version of Barry-Schwartz' suggestion:

    I had the same Bond Mutual Fund in both a taxable and an IRA account.  These were Standard A shares.  The Company just created an Institutional version of that fund (same underlying portfolio, but lower servicing costs).  I was able to exchange all of my shares in the taxable account to Institutional shares, but I did not qualify to make the same exchange in my IRA account.  At the time of the exchange the shares had the same value, so it was exactly a one for one exchange (no split necessary).

    So in the end I had two slightly different funds; the original Standard Funds in my IRA and the new Institutional funds in my taxable account.  Note that why Barry-Schwartz' approach will incorrectly record a short-term CG in Money if shares in the taxable account are sold within one year and that also I lose the Total gain summary of the original investment in the Portfolio listing, it has the advantage of correctly listing the name of the shares involved in the transactions prior to the exchange.



    • Edited by bobjbkln Monday, May 18, 2015 6:26 PM
    Monday, May 18, 2015 6:02 PM
  • I hope this explanation clears things up a bit.  This a a Fixed Income (bond) mutual fund.  Between the time of the original purchases and the exchange there have been 159 dividend (and CG) reinvestment purchases, hence my question as to using the cost basis of the original investment at the time of the sale.  Secondly, this tax-free exchange was not made between accounts, so this should not change your view of how things work and that therefore the Cash Account is the same for both sides of the exchange. 

    To be clear (I hope), originally I had the same investment in two separate accounts (one taxable, one retirement), but the exchange took place only for the shares owned in the taxable account.   Hence, my ending situation of only new (Institutional type) shares in the taxable account and only Standard type shares in the IRA.

    Again thanks for your help.

    Monday, May 18, 2015 6:21 PM