Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

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markcoop
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Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by markcoop » Wed Oct 09, 2019 8:18 pm

An elderly family member (in her 80s) owns Vanguard New York Long-Term Tax-Exempt Fund. It has around a $17K taxable gain right now. She is moving out of NY state shortly. I assume it does not make sense to own the fund if not living in NY. I also assume it does not make sense to pay a capital gains tax if the money is not needed. So, does it make sense to sell this fund?
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by Silk McCue » Wed Oct 09, 2019 8:22 pm

I would say the tax consequences of selling it now or later would depend on the taxation to be applied in the state they are moving to.

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by livesoft » Wed Oct 09, 2019 8:23 pm

When I moved, I stopped automatic reinvesting. Then I eventually sold my shares when I needed money.

There is little need to realize a cap gain just from moving, but maybe there are other needs or uses for the money. Besides, shouldn't there be enough carryover losses to offset gains?
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by Grt2bOutdoors » Wed Oct 09, 2019 8:23 pm

markcoop wrote:
Wed Oct 09, 2019 8:18 pm
An elderly family member (in her 80s) owns Vanguard New York Long-Term Tax-Exempt Fund. It has around a $17K taxable gain right now. She is moving out of NY state shortly. I assume it does not make sense to own the fund if not living in NY. I also assume it does not make sense to pay a capital gains tax if the money is not needed. So, does it make sense to sell this fund?
Why sell it? If the fund is holding municipal securities, the interest is still tax exempt on a Federal level. Depending upon the state she moves to, she may or may not have to pay tax on the interest either. I would not be so quick to hit the "sell" button.
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markcoop
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by markcoop » Wed Oct 09, 2019 8:25 pm

It's possible she may never sell it. If she did in the future, there is a state income (I think around 5%) in her new state. If we don't sell it, I would redirect an dividends/capital gains from the fund to another fund (in fact, already did this).
Last edited by markcoop on Thu Oct 10, 2019 9:39 am, edited 1 time in total.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by markcoop » Wed Oct 09, 2019 8:28 pm

livesoft wrote:
Wed Oct 09, 2019 8:23 pm
Besides, shouldn't there be enough carryover losses to offset gains?
I think she does have some carryover losses (not much), but I'd prefer them to offset income.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by markcoop » Thu Oct 10, 2019 10:38 am

Grt2bOutdoors wrote:
Wed Oct 09, 2019 8:23 pm
Why sell it? If the fund is holding municipal securities, the interest is still tax exempt on a Federal level. Depending upon the state she moves to, she may or may not have to pay tax on the interest either. I would not be so quick to hit the "sell" button.
Using the NY Long-Term Tax-Exempt fund will probably earn slightly less interest compared to a comparable Tax-exempt fund that is not NY specific. I guess I'm weighing that lost income vs the capital gains tax on $17K. I imagine hard to compute the break-even point between the options. My gut is to agree with what others above said and not sell it.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by RickBoglehead » Thu Oct 10, 2019 10:40 am

Depending on her taxable income, she may owe zero capital gains tax. Or, you may be able to sell some each year in the 0% bracket.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by Grt2bOutdoors » Thu Oct 10, 2019 11:47 am

markcoop wrote:
Thu Oct 10, 2019 10:38 am
Grt2bOutdoors wrote:
Wed Oct 09, 2019 8:23 pm
Why sell it? If the fund is holding municipal securities, the interest is still tax exempt on a Federal level. Depending upon the state she moves to, she may or may not have to pay tax on the interest either. I would not be so quick to hit the "sell" button.
Using the NY Long-Term Tax-Exempt fund will probably earn slightly less interest compared to a comparable Tax-exempt fund that is not NY specific. I guess I'm weighing that lost income vs the capital gains tax on $17K. I imagine hard to compute the break-even point between the options. My gut is to agree with what others above said and not sell it.
Let's say she pays 15% LTCG tax, that is $2,550 in tax. I doubt she will earn $2,550 + to make up for the tax and lost opportunity in additional interest earnings forgone on account of the money not remaining invested. I'm with the others and say don't sell.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by MikeG62 » Thu Oct 10, 2019 3:29 pm

RickBoglehead wrote:
Thu Oct 10, 2019 10:40 am
Depending on her taxable income, she may owe zero capital gains tax. Or, you may be able to sell some each year in the 0% bracket.
I think this is the key. Is her income such that she is paying any Federal tax on her capital gains? If she is already paying Federal tax on qualified dividends and capital gains and this would be fully taxable at 15%, I would not sell it. If she has some room before hitting the top of the zero percent Federal capital gains tax rate, I might sell up to the top of the zero percent rate. Keep in mind that any sales might also give rise to state taxes. So it's not just a Federal tax decision.

I would not feel compelled to sell it simply because she is moving out of state.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by ivk5 » Thu Oct 10, 2019 3:57 pm

markcoop wrote:
Thu Oct 10, 2019 10:38 am
Grt2bOutdoors wrote:
Wed Oct 09, 2019 8:23 pm
Why sell it? If the fund is holding municipal securities, the interest is still tax exempt on a Federal level. Depending upon the state she moves to, she may or may not have to pay tax on the interest either. I would not be so quick to hit the "sell" button.
Using the NY Long-Term Tax-Exempt fund will probably earn slightly less interest compared to a comparable Tax-exempt fund that is not NY specific. I guess I'm weighing that lost income vs the capital gains tax on $17K. I imagine hard to compute the break-even point between the options. My gut is to agree with what others above said and not sell it.
Can’t you just compare the current SEC yield on a tax-adjusted basis to a reasonably similar duration and credit quality national muni fund (and state-specific fund in new state of residence, if an acceptable fund exists) to compute this?

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by retired@50 » Thu Oct 10, 2019 4:30 pm

RickBoglehead wrote:
Thu Oct 10, 2019 10:40 am
Depending on her taxable income, she may owe zero capital gains tax. Or, you may be able to sell some each year in the 0% bracket.
This sounds like a reasonable plan to me.

The downside of continuing to hold onto the fund is that you're holding a municipal bond fund that isn't well diversified and the holder of the fund is bearing state-specific risk, without the associated reward of avoiding NY taxes. Slowly selling off the NY fund for a National municipal fund may be appropriate. Regards,

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by bluquark » Thu Oct 10, 2019 4:35 pm

markcoop wrote:
Thu Oct 10, 2019 10:38 am
Using the NY Long-Term Tax-Exempt fund will probably earn slightly less interest compared to a comparable Tax-exempt fund that is not NY specific. I guess I'm weighing that lost income vs the capital gains tax on $17K. I imagine hard to compute the break-even point between the options. My gut is to agree with what others above said and not sell it.
Provided we rule out possibilities like interest rates rising, state-specific credit risk or getting a step-up in basis on death, the math is relatively simple.

VNYUX SEC yield: 1.78%
VWLTX SEC yield: 1.87%
Difference: 0.09%

Capital gains tax rate: 15%
Time-value of taxed amount next year: 15% * 1.87% = 0.2%

The time-value of the capital gains is about twice as high, so I conclude you should not sell today.

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by Artsdoctor » Thu Oct 10, 2019 5:05 pm

markcoop wrote:
Wed Oct 09, 2019 8:18 pm
An elderly family member (in her 80s) owns Vanguard New York Long-Term Tax-Exempt Fund. It has around a $17K taxable gain right now. She is moving out of NY state shortly. I assume it does not make sense to own the fund if not living in NY. I also assume it does not make sense to pay a capital gains tax if the money is not needed. So, does it make sense to sell this fund?
The first thing I'd look at is whether or not it's an appropriate fund for her to own in the first place. She's in her 80's and it has an average maturity of over 16 years. At this time, the duration is not that bad at 5.8 years, which isn't too bad for a "long" fund.

If you decide that it fits with her investment goals, then at least shut off the automatic reinvestment of dividends. It's one thing to keep state-specific fund when you move out of state, whereas it's another to keep adding to it.

Then, take a look and see if you can sell specific lots. It might require some bookkeeping and some effort, but if you can sell specific lots, you may find that the lots with the highest cost basis might be easily sold--even to invest in the national intermediate-term tax-exempt fund, if appropriate. Although she has $17K in gains, you don't have to sell everything.

If you have tax software program, try to figure out exactly how much it would cost her to sell the fund. You may be surprised at how little (or how much) she'll need to be paying in both federal and state taxes.

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by uncaD » Thu Oct 10, 2019 5:38 pm

When I moved out of NY in 2015, Vanguard forced me to sell it.

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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by markcoop » Thu Oct 10, 2019 8:28 pm

bluquark wrote:
Thu Oct 10, 2019 4:35 pm
markcoop wrote:
Thu Oct 10, 2019 10:38 am
Using the NY Long-Term Tax-Exempt fund will probably earn slightly less interest compared to a comparable Tax-exempt fund that is not NY specific. I guess I'm weighing that lost income vs the capital gains tax on $17K. I imagine hard to compute the break-even point between the options. My gut is to agree with what others above said and not sell it.
Provided we rule out possibilities like interest rates rising, state-specific credit risk or getting a step-up in basis on death, the math is relatively simple.

VNYUX SEC yield: 1.78%
VWLTX SEC yield: 1.87%
Difference: 0.09%

Capital gains tax rate: 15%
Time-value of taxed amount next year: 15% * 1.87% = 0.2%

The time-value of the capital gains is about twice as high, so I conclude you should not sell today.
Yes, it is an easy equation if the funds had the exact same duration. I can then take the difference, multiply by the total and divide the cap gains amount by that amount to get the break even point. But the two funds mentioned have slightly different durations. So, wasn't sure how to factor that in.

Some other answers:
1) Would be fully taxable at 15%
2) As far as it being an appropriate investment for her, she actually owns 3 bond funds - Limited Term is the biggest holding at around 50%. TIPS and and the NY fund are each around 25%. I had this conversation about 5 years ago.
3) I guess if Vanguard makes me sell it, then I have no choice. Just seems odd they would make you do that.
Last edited by markcoop on Thu Oct 10, 2019 9:04 pm, edited 1 time in total.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by grabiner » Thu Oct 10, 2019 8:38 pm

RickBoglehead wrote:
Thu Oct 10, 2019 10:40 am
Depending on her taxable income, she may owe zero capital gains tax. Or, you may be able to sell some each year in the 0% bracket.
If she owes zero capital-gains tax, she should not be holding munis at all; munis should yield significantly less than taxable bonds of comparable risk in a 12% bracket. Even in New York City, I would prefer a taxable bond fund (possibly a Treasury fund for the state tax exemption) in that bracket.
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Re: Sell Vanguard New York Long-Term Tax-Exempt Fund when move out of NY?

Post by bluquark » Thu Oct 10, 2019 8:58 pm

markcoop wrote:
Thu Oct 10, 2019 8:28 pm
Yes, it is an easy equation if the funds had the exact same duration. I can than take the difference, multiply by the total and divide the cap gains amount by that amount to get the break even point. But the two funds mentioned have slightly different durations. So, wasn't sure how to factor that in.
That's moot given that the national long-term muni fund has slightly higher ("worse") duration, so it just strengthens the case for not selling even more.

The only idiosyncratic factor weighing in favor of selling is the state-specific credit risk. In my personal opinion, that risk is negligible for a rich diversified state like New York, although not everyone agrees with me on this.

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