Reconstructing What You Paid for Your Mutual Fund Shares

Also, converting a vacation home to a primary residence and sorting out who owes inheritance taxes.
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The Tax Forum tackles two common mutual fund issues this week, cost basis and distributions. We'll also discuss how to turn your vacation home into your permanent residence and answer an estate tax question.

Send any other tax questions to Please remember to include your full name.

Finding Your Cost Basis

I bought shares in a mutual fund several years ago at various prices and have not put new money into the fund in the last three years, but I reinvested all dividends. I know I have paid taxes all along on the distributions, but now if I want to sell all my holdings in the fund, do I have to pay more taxes? And if I don't have any of the paperwork, how can I compute the taxes? -- Richard Davis


This question comes up all the time.

The first thing you need to do is call the fund company to get a history of your mutual fund transactions.

Or try the Internet.


, for instance, has the last 16 months of your mutual fund statements online, says spokeswoman Debra McConnell. If you need to go back more than 16 months, call the company and it'll do some research for you. The good news: If you're a Fidelity investor, your cost basis is calculated for you on your monthly mutual fund statements.

Going forward, you need to hold onto all your confirmation statements, especially if you reinvest your dividends. Keep track of any fees or charges you pay. These costs are added to your basis. Either of the leading personal finance software programs,



Microsoft Money

, will help you track the cost basis of your fund investments.

But note that fees paid to redeem shares are usually a reduction in the redemption price, not the original basis.

Fund Distribution Confusion

I understand that if you own shares in a mutual fund and the net asset value at year-end falls below what you originally bought it for, you could still owe capital gains. This is because some mutual funds actively buy and sell shares within the portfolio. However, isn't it true that when it comes time for the fund to distribute earnings, the distributed earnings will necessarily be larger than the capital gains incurred, since capital gains are a percentage of profits/earnings made during the buying and selling of shares within the fund? -- Roy Rogers


With mutual funds, there are two different events that may trigger capital gains tax -- when you sell your shares and when you get a distribution from the fund.

If, at year-end, the net asset value of your mutual fund shares is lower than the amount you originally paid, then sure, you've lost money -- but only on paper. As long as you don't sell the shares, you won't have to worry about capital gains tax. And if you do sell, you won't owe capital gains tax because you don't have any gain.

Distributions are a different story. Remember, a mutual fund is a pass-through entity. That means the fund must pass on all its net gains to you by the end of its fiscal year.

Each time a fund manager makes a sale and incurs a gain, it must get passed on to you. So say your fund manager bought a stock at $20 last year. This year he decided to sell it, and it's trading at $60. He has incurred a $40-per-share gain that will be distributed to you and your fellow shareholders.

What I think you're referring to in your question is that your distributions may actually be larger than the difference between your original purchase price and the closing NAV. And that's very possible for the exact reason you stated -- some funds trade often.

Moving to My Vacation Home

My wife owns a vacation property, which she wants to convert to her primary residence. I plan to keep our home in town as a primary residence. What must she do to establish the vacation home as her primary residence? -- Jerry Crews


I assume you and your wife are separating.

If she is planning on making the vacation home her primary home, you would want to change the title of the home to reflect her single ownership, not your joint ownership, recommends Kathy Burlison, tax research and training specialist at

H&R Block

. There are no tax consequences of property transferred as a result of divorce.

Then all your wife has to do is move into the vacation home and live there full-time. She'll need to change her mailing address and driver's license to show proof of her change of residence. In addition, she should file

Form 8822

- Change of Address

to notify the

Internal Revenue Service


Assuming she has owned the vacation home for two of the last five years, once she lives there full-time for two years, she'll qualify for the primary home sale exclusion of $250,000 for a single person when she sells the place, says Burlison.

Tax on Inheritance

My wife is a beneficiary of an estate that is worth less that $500,000. Is there a death tax on an estate that size, and is the portion that my wife will receive taxable income on our 1999 return? -- Mike McConnaughey


To start, the recipient of inherited property never pays any tax, reminds Laura Peebles, director of estates, gifts and trusts at

Deloitte & Touche

in Washington. "The executor or trustee of the trust is responsible for making sure all taxes are paid


the assets are disbursed to the heirs." So it's not your wife's job to worry about estate tax.

As long as the deceased did not use up all of her lifetime unified estate and gift tax exclusion of $625,000, the estate should not owe tax anyway.

In most instances, your wife does not have to report any inherited property on her income tax return. An exception would be in the case of an inherited IRA account. She may be forced to take a distribution of the account because of an election the deceased had made, notes Peebles. In this case, the amount would be considered taxable other income and must be reported on her tax return.

Tax Pros Weigh In


week, I said it was "pathetic" that tax professionals made errors when filling in their clients' social security numbers. Well, the tax professionals of the world weren't happy about that. Reader

Ed Cheng

wrote in with this comment:

"Speaking as a 'pathetic' tax professional, I can only enter the Social Security number as provided by my clients. Unfortunately, at times, their versions of which names go with which Social Security numbers do not match with the records of the

Social Security Administration

. I have to take the word of my clients and have no way of verifying the accuracy, short of checking them with the Social Security Administration."

OK. Fine. I know that it's not the tax preparer's job to audit the information supplied by the client. But professionals should at least remind their clients to doublecheck these numbers. These are unnecessarily silly mistakes.

TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.