Problem: I'd like to sell an investment that has gone down in value to realize a loss but want to buy it back.

        Strategy: Don't run afoul of the wash-sale rules.

        Chris White, a certified financial planner with Provident Financial Advisors, says that the IRS will disallow an income tax deduction on a capital loss if you rebuy a “substantially identical” security within 30 days.

        Generally, selling for a loss first offsets gains, then can provide an income tax deduction up to $3,000. If losses exceed $3,000, the surplus can be carried forward indefinitely until death. Some investors wanting to take advantage of these tax benefits need to avoid the wash-sale rule if they plan to buy the investment back.

        The IRS considers a sale and a purchase of the same or very similar investment a wash sale, forbidding the loss recognition. A wash sale occurs when “substantially identical” securities are purchased within 30 days either before or after the sale date of the realized loss.

        The IRS vaguely defines “substantially identical,” but the interpretation is clearer for individual securities. Generally, the wash-sale rule applies when the same stock is bought and sold (it can also apply to stock and stock options on the same company). Swapping holdings of competitors is not considered a wash sale.

        The wash-sale rule is more ambiguous with mutual funds. To determine if there is a close correlation of the funds, criteria such as investment objectives, strategies, asset classes, staying in the same fund family and management methodologies are evaluated. The IRS also disallows the deduction if a related party buys an investment that was sold at a loss. A related party can be a spouse, trust account, IRA, partnership or other entities involving the investor.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your unique tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati, OH 45202, or e-mail ahiggins @enquirer.com.

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