12 Jan When your fund makes a big change

Q. I have shares of the Financial Select Sector SPDR fund (XLF). In September 2016 this fund was “rebalanced” and I received shares of the newly-established Real Estate SPDR (XLRE). Do I treat this as a spinoff for tax purposes? If I do, what date do I use to determine the fair market values? And where can I find historical share closing prices for XLRE?
— Do-it-yourselfer

A. When changes are made to funds, it can be a challenge to follow.

Your investment, the Financial Select Sector SPDR (XLF), is an exchange-traded fund that eliminated its exposure to real estate via a special dividend paid to XLF shareholders, said Jodi Cirignano, a certified financial planner with Lassus Wherley in New Providence.

She said XLF shareholders received 0.139146 shares of the Real Estate Select Sector SPDR Fund (XLRE) for each XLF share owned.

This special dividend is partially taxable, Cirignano said.

“Based on current estimates, 35 percent of the dividend is taxable as ordinary income and 65 percent as a non-taxable return of capital to XLF shareholders,” she said. “When corporate actions such as this one trigger a change affecting the tax basis of securities, the issuer must file a Form 8937 to provide additional tax information.”

The issuer, XLF, filed Form 8937, which can be found at www.spdrs.com, she said.

According to Form 8937, the total dividend per XLF share was $4.5292, with $2.9588 representing a non-taxable return of capital per XLF share, Cirignano said.

“The non-taxable return of capital portion of the distribution reduces your tax basis in XLF shares,” she said. “To compute the basis reduction, multiply the number of XLF shares held at the time of the dividend by $2.9588.”

For example, she said, if you owned 1,000 shares at the time of the distribution, you would reduce your tax basis in XLF by $2,958.80.

Your tax basis in XLRE is the fair market value of the shares on the day these were received or September 22, 2016, she said, noting you can find historical price data for XLRE at finance.yahoo.com and other personal finance websites.

“In early 2017, you will receive Form 1099-DIV that will provide you with information on how to report this distribution for Federal income tax purposes,” Cirignano said. “As always, we recommend that you consult with your tax advisor regarding your personal tax situation.”

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This post was first published in January 2017.