College bonds are municipal bonds issued by institutions of higher learning. They may be used for capital improvements, such as building new classrooms, dormitories and athletic facilities, or to finance student loans. College bonds trade in the open market like other municipal bonds and may be bought and sold on the same basis as other municipal bonds. Exchanging college bonds is an investment strategy that some investors use to establish a loss for tax purposes while maintaining their investment position with a comparable bond.
1. Find out how much your college bonds are worth. College bonds, like most municipal bonds, usually trade in the over-the-counter market. Municipal bonds typically trade in $5,000 face value increments, but the price of individual bonds may fluctuate based on prevailing interest rates, time to maturity and changes in the credit rating of the issuing institution. The market price of bonds typically moves in the opposite direction of prevailing interest rates. The market price of bonds will move closer to their face value as they near their maturity date. Your investments broker can usually provide you with the most recent price for which your college bond sold.
2. Research other college bonds that have similar maturity dates, coupon rates and credit ratings as the bonds you own. Place simultaneous orders with your broker to sell the college bonds you own and purchase a similar amount of comparable college bonds with the proceeds from the sale. This will establish your loss for tax purposes on your original college bonds, and set a new basis for your new bonds.
3. Report the college bond exchange, sometimes referred to as a bond swap, when you file your federal income tax return. You will need to complete IRS Form 1040 Schedule D to determine your capital gain or loss, which may be short-term or long-term depending on how long you held your college bond prior to selling it. Report your gain or loss on Line 13 of Form 1040.
- The interest on college bonds is usually, but not always, free from federal income tax. Make sure you are aware of the tax status of any college bond you purchase.
- Exchanging college bonds will usually result in a capital gain or loss. Capital gains are taxable, even if the interest on the bonds is tax exempt.
- College bonds are not backed by the full faith and credit of the U.S. government and may not be backed by the full faith and credit of the issuing municipality. College bonds involve some level of risk.
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