Q: About two years ago I invested $6,000 in a GNMA Government National Mortgage Association fund with reinvestment of interest and principal. The account built up to $10,000; during that period I paid income tax on the interest received each year. I began to notice that the interest rate was slipping and that a larger amount of each month's reinvestment was from principal. When I saw that the current sales price had slipped to 86, I got out, receiving $8,600 for the $10,000 in my account. There is some sort of loss involved -- but what kind? I would think there would be some capital loss; is there also an interest loss? How do I go about assigning the loss? I have the monthly reports, but they seem more confusing than informative.

A: Without some other numbers, I can't tell whether you have a loss or not; but I can explain how to make the determination. You must add to your original $6,000 investment the total of all the interest payments received (and reported for tax purposes) to get your cost basis.

Then compare that cost basis with the $8,600 received; if the cost is greater than $8,600, you have a loss; if less than $8,600, you have a gain. Whichever it turns out to be, you'll have to split the total into two separate transactions: short term for those shares bought with interest reinvested in the six months preceding the sale, and long term for everything else.

Technically, you are supposed to subtract from the original $6,000 cost the amounts received as a return of principal. But because those amounts were immediately reinvested and would then have to be added back as part of the cost basis, you can disregard that part of the transactions except for the short-term/long-term determination.

Your question points up a little understood aspect of GNMA investments. As the name implies, a GNMA fund invests in a pool of GNMA mortgages, all either FHA- or VA-insured and, thus, guaranteed by the U.S. government for payment of both interest and principal. They are therefore quite safe, and usually yield a higher return than Treasury paper or bank certificates.

But there are always early mortgage repayments as people sell their homes for one reason or another -- they move or die or divorce. In a period of falling interest rates, repayments jump as even those who stay put decide to refinance their original mortgages to take advantage of lower rates. As a result, a larger piece of each month's distribution is principal. Then, as each month's payment is reinvested and goes into new mortgages, the interest rate drops, too.

Although I like GNMAs for some investors -- particularly retirees looking for a regular monthly payout from a very safe investment -- I generally prefer a GNMA unit trust rather than a fund during a period when I anticipate falling interest rates.

Q: My husband and I each owned houses before we were married. We waited to marry until his house was sold, hoping that some day I could also use the once-in-a-lifetime after-55 tax benefit. However, we filed jointly the first year we were married -- the same year as his house was sold. Will that affect my receiving the benefit, either before or after his death?

A: The filing of a joint return won't make any difference; the fact is that your husband's use of the over-55 tax exclusion -- even though it was before your marriage -- bars you from ever using this tax break. You won't regain the right after his death, either; once he used the exclusion, your later marriage effectively wiped out your right to claim another one.

Q: Last month you discussed the tax savings in donating appreciated securities to charity, when the tax on the gain falls by the wayside. Would this change if the donation consisted of E bonds instead of stock shares? If there were a tax, who would pay it -- the donor or the charity?

A: The situation is different with savings bonds, either E or EE. Here the increase in value is due to accrued interest on which the tax has been deferred, rather than appreciation. So on disposition, whether by gift or redemption, the original owner -- the donor, in the case of a donation to charity -- is responsible for reporting the accrued interest for tax purposes.