A bond swap occurs when an investor sells one bond and uses the proceeds to purchase another bond, often at the same price. Investors engage in bond swaps for a variety of reasons. For example, investors may want to take a tax loss by selling one bond at a loss but then preserve their investment by simultaneously buying a similar bond. At other times, investors swap bonds to obtain a higher yield and return on their bond investments
Advantages
- Creates a capital loss for tax purposes
- Can maintain or enhance the overall credit quality of your portfolio,
- Can maintain or increase current income.
It's important to note that tax swaps are not for everyone. And as always, you should consult with a tax professional before making any investment decision that is designed to produce tax benefits.
As with much year-end tax planning, the earlier you begin scouting for promising candidates for swapping, the better. The supply dwindles and competition from other investors heats up as the year draws to an end.
