Taxes are a part of life (and death) in the United States. If you earn sufficient income, then you must report that income and pay a tax on the income if it exceeds allowable deductions. One such deduction is a capital loss.

In the simplest sense, a capital loss occurs when you sell property (stock, personal property, real estate property, etc.) for less than it cost, or its basis. This loss can either offset capital gains in the year they are incurred or can be used as a deduction up to $3,000 against your ordinary income. If the capital loss is not used to offset your gains, and is greater than $3,000, then you can carry it over to the next year to either off-set gains derived in that year, or it can be used again as a deduction against your ordinary income up to $3,000.

Although it would be nice to leave your carryover loss to a loved-one or worthy charity, it is not allowed. The carryover loss expires upon your death, but it can be used on your final individual income tax return in the year of your death.

It should be noted that it is possible to receive a carryover loss from an estate or trust. For example, depending on the circumstances, if your estate or trust reports a capital loss on its fiduciary income tax returns that is not offset by capital gains and exceeds the $3,000 deduction of ordinary income, then it can be carried over to the following year. In the final year, the estate will distribute deductions to your residuary beneficiaries, including any carryover capital losses.

These losses can be used by the residuary beneficiary during his/her lifetime, but will expire upon his/her death.

If you have significant carryover losses, you should speak with a qualified estate planning attorney to discuss possible options to maximize the loss. Contact us with questions or comments.

Eric J. Einhart
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530
800-680-1717