How do I determine cost basis on interim principal payments received on inherited agency bonds? I have FMV on date of death, but don't know how to apply this.

The costs basis for the interim principal payments received on inherited agency bonds should be the FMV on the date of death.   If you are holding these bonds until their maturity, you will want to keep a copy of the death certificate and the documentation you have showing the FMV with your bond records.   When these are matured and you cash in the bonds, you will need the date of death for the date of acquisition and the FMV of the bonds on the date of death for the costs basis of these bonds.

Thank you so much for your response.  So as a practical example, the FMV of 3000 shares of a Freddie Mac bond was $220.17 on the date of death.  There were principal payments of $16.65 over the course of last year.  Since I have no means of knowing what % of the principal the $16.65 represents, how can I determine the cost basis for that  amount?

To follow-up on the comments from @JillS56, your principal payments are essentially just a return of your original investment.  As such, they are not taxable.  In terms of your basis, as @JillS56 mentioned, use the date of death value as your cost basis which appears to be $220.17.

@sfritz01

Thank you George,

I guess my confusion is that the FMV of the bond will have likely changed at the point of each principal payment.  So say the FMV of the total bond changed from $200.17 from date of death to $198.97 prior to the first interim principal payment, which, if I'm thinking about it correctly, would in turn create a net loss (albeit minor in this case). So that brings me back to how to calculate the cost basis of the principal portion returned since it doesn't show on my 1099.  Thanks, Steve

It does not matter if the value changes after the date of death. Your cost basis doesn't change with fluctuation in the market.

There are rules for the financial agents who hold investments and report transactions on redemption or sales of stock/bonds.

1. Covered means the agent knows and provides the cost basis
2. Noncovered means the agent does NOT know the cost basis  

Okay, thank you.  So for the interim principal payments I received, I should report a cost basis equal to the principal amount in order to cancel out any tax owed, correct?

Yes, that is correct for as long as you have a principal balance remaining.  Continue to reduce your cost basis by each principal payment received until it reaches zero.  At that point all payments received will be fully taxable.

Got it, thank you so much!