Nontaxable Transactions

Believe it or not, there are a few types of investment transactions that are not considered taxable events.

If you redeem shares of a money market mutual fund, it's not a taxable event because the value of each share is fixed at $1. Your redemption price for each share will be exactly the same as your tax basis in each share, so no gain or loss is recognized.

Any transfer of property from one spouse to another, either while married, or incident to a divorce or separation agreement, is not taxable. Generally, the spouse receiving the property must continue using the same tax basis as the property had in the hands of the donor spouse (which means that the recipient will eventually get stuck with the capital gains tax bill when the property is sold).

Insurance and annuities. Certain exchanges of insurance policies and annuity contracts are not taxable events if the insured person or annuitant is the same under both the old contract and the new one. This applies to transactions such as exchanging:

• one life insurance policy for another
• a life insurance policy for an endowment or annuity contract
• an endowment contract for an annuity contract
• an endowment contract for another endowment contract that provides for regular payments beginning no later than the date on the original contract
• one annuity contract for another

Certain types of stock trades are not taxable events:

• exchanges of stock for other stock in the same corporation, as long as the exchange is common stock for common, or preferred stock for preferred, whether the trade is between two stockholders or between the corporation itself and a stockholder
• exchanges of stock for other stock in the same or a different corporation that occur because of a merger, acquisition, recapitalization, or some other form of reorganization, provided certain rules are followed
• conversion of a convertible bond into stock shares, or convertible preferred into common shares, according to the terms of the security
• transfers of property to a corporation in exchange for stock in the corporation, if you (or your group of investors) own at least 80 percent of the corporation after the transfer (for small businesses, this generally means that incorporating your business is not a taxable event).

Aside from these listed exceptions, you can't treat a trade of one type of stock, bond, note, beneficial interest, or partnership interest for another as a nontaxable like-kind exchange.

However, if you exchange other types of business or investment property (such as a store for an apartment building, a car for a truck, etc.), you may be able to avoid tax on the exchange if certain rules are met. In most cases we'd advise you to see a professional tax advisor to make sure that your transaction qualifies under the "like-kind exchange" rules and that you retain proper records, including the tax basis of the new property you receive, for the transaction.