Funds as 'Placeholders' in Tax-Loss Sales

Irritated investors have come up with a variety of workarounds over the years. The most obvious is to sell the stock and buy its nearest competitor, such as holding Merck(MRK Quote) instead of Pfizer(PFE Quote) for 30 days. The downside is that you're open to a lot of market "noise" on individual stocks.

The good news? If you're holding one of Wall Street's worst stocks this year, there's a pretty good chance there's a mutual fund or an exchange-traded fund that can work as a makeshift placeholder instead. You can sell the stock, park that money in a fund that tracks the same industry sector for 30 days, and then, if you want, sell the fund and buy back the stock.

It doesn't cover you completely. And there are still some questions about IRS rules (more about this below). But using a fund can be a decent workaround.

That's especially true if your stock is part of a sector that's out of favor across the board. Broadly speaking, you'd expect the shares to rise, and fall, in tandem.

Look at homebuilding stocks. The stock market has taken a wrecking ball to the entire sector this year, as house prices have finally begun to fall. Among those left in the wreckage: Lennar(LEN Quote), KB Home (KBH Quote) and DR Horton (DHI Quote). If you're sitting on a loss on any of these and want to book it for tax purposes, there are two exchange-traded funds that track the sector: The Homebuilders SPDR (XHB Quote) from State Street and Barclays' Dow Jones US Home Construction Index iShare (ITB Quote).