For the first time ever my broker reported royalty income net of interest income earned by the trust and issued a 1099-INT for that amount. Then reported the net royalty income on 1099-MISC. Has anyone ever had this happen. In the past I have ignored the breakdown of gross royalty income less expenses per the tax booklet and just reported royalty income received on schedule E.
Seems a bit silly since I understand that both royalty income and interest are taxed at the marginal tax rate of the taxpayer.
I believe the 'Royaly income" is tax deferred until you sell, at which time you must adjust the purchase price by the amount of income recieved. I have never heard of trust 'distributions' being called income! The trusts send me some forms to fill at tax time to determine what is what. I am more familiar with Canadian Trusts---they call the money Distributions, never dividends or interest. Hope this does not confuse you more! I haven't messed with US Trusts again till just last week. I prefer to TRADE THEM as they rise about 4X the distribution amount 7-10 days before 'x' day, and then drop about 4X times the distribution after Holder of Record day. In the case of SBR recently, similar action took place, and I made 3.5X the Distr. than if I had held the stock and taken the Distr. Since it pays monthly, you have 12 times per year to play the game. Here is the proof--works about 10 months out of 12. http://www.etfconnect.com/marketwatch/interactivecharting.asp?symb=mtr&comp=&compidx=aaaaa%7E0&time=1yr&freq=1dy&type=2&uf=131072&ma=0&maval=60&lf=1&lf2=0&lf3=0&x=42&y=10. This is a great chart site, as it shows what happens before X-day and afterwards. On SBR in the last 2 weeks I made 3.5 x the .42 cent Distribution. Multiply the % rate by the 3.5 and it is very meaningful.I DO NOT WANT THE DIVIDEND--I WANT THE CAP.GAINS.Many of US Trusts and Canadian royalty trusts have different X-days ,so if you jump around you can make possibly 24-30 trades per year!! Study the chart--it tells the story. Canada takes 15% W/H, but you get a direct credit for the whole amount on your US taxes--nothing lost. I have very low commisions with www.interactive brokers .com 200 shares at any price for $1.00--that's 1/2 penny in and another 1/2 penny out--insignificant. Plus I can afford to accumulate/sell in smaller increments.They have a $12. /MO. MINIMUM CHARGE. So I basically consider any trust to be a STRONG BUY after it has fallen 3 to 5 times the amount of the dividend, and a STRONG SELL after I have a cap gain OF AT LEAST 3x JUST BEFORE X-DAY .
Royalty income is tax deferred to the extent of depletion claimed. Upon sale, all depletion claimed is recaptured as ordinary income. Usually the interest is miniscule (usually around a $1 for every $1000 of distribution).
In your strategy, aren't all your cap gains short term and taxed as ordinary income?