GNMA's are pools of mortgages backed
by the Government National Mortgage
Association. Investors can buy units of
par value participation in the pool
and receive prorata their respective
share of interest income and principal
repayments as the borrowers in the pool
make their mortgage payments.
GNMA pools are often sold at a premium
to par value.
|
|
Many investors wonder how to report
the principal repayments that they receive
during the tax year that are reported on
Form 1099-B. This instance is merely a
special case of a taxable bond bought
at a premium. Each principal payment
received is a sale at par value of a
portion of a bond bought at a
premium.
Click on the image to the right to access
our Return of Principal Calculator to
compute your cost basis and gain or loss
on each ROP payment received.
|
|
 |
| Return of Principal Calculator |
|
|
Here's an example of how the tax accounting works for GNMA's:
On 1/1/2007, you bought $50,000 of a GNMA 7.00% pool due 12/31/2027 at a price
of $108 per $100 of par value. Your total purchase cost was $54,000.00
During tax year 2007, you collected $1,000.00 of principal and $3,500 of interest
income, both of which were reported to you on your Form 1099.
What is your cost basis?
Multiply the principal payments you received by your purchase price per $100:
$1,000.00 x $108 / $100 = $1080.00
Your cost basis for the $1,000.00 proceeds reported to you on your Form 1099-B
is $1,080.00. Reporting this cost basis on your Capital Gain Schedule D produces
a capital loss of $80.00 which you can use to shelter your other capital gains or
to shelter ordinary income up to $3,000.00 per year.
It's a bit of a pain to calculate, but well worth it when you consider the tax savings
that you can gain. These tax savings would be wasted if you just take the easy way
out and claim par value as your cost basis for the principal payments you receive.
|
|