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.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.