Saving a Capital Loss

[Edsel]

A retired couple has a large LT capital loss.  The husband inherited land in 2006 valued as of the date of his mother's death.  Then came the real estate crash of 2008-2009.  Property was sold in 2011 at a loss of $130,000.

This couple does not invest in anything and does not function in any sense to create capital gains.  Now in their 70s, they can only take $3000 a year.  With $115,000 of the loss remaining, they will not live long enough to realize the tax benefit.

It is my understanding that if they both died tomorrow, the $115,000 tax loss evaporates and is lost forever - no benefit to anyone (please advise if this is not correct).

Question:  Is there any action this couple can take to salvage this large tax loss or pass on to beneficiaries?

[BulldogTom]

No way to pass to beneficiaries.  

If they have significant assets and a good investment advisor, they could play in the market.   If they win, the gains would be tax free up to the amount of the Capital Loss Carryover.

I am not aware of any other way they can harvest that loss.

Tom
Modesto, CA

[Lion EA]

Someone will jump in here to tell me if I am wrong.  The capital loss belongs to the husband, if the property was in his name.  If the husband passes away, the capital loss is gone.

You might want to research if they did commingle the property and created a joint loss, if the wife "owns" any of the capital loss, in case she survives her husband.

[Edsel]

Lion, I think I've been down this road before with another client.  I believe if the original loss was filed on a joint return, the loss is available to the wife if husband passes first.  The capital loss goes with the party creating it in the event of divorce or separation.

I could be wrong...

[Roberts]

3 minutes ago, Edsel said:

Lion, I think I've been down this road before with another client.  I believe if the original loss was filed on a joint return, the loss is available to the wife if husband passes first.  The capital loss goes with the party creating it in the event of divorce or separation.

I could be wrong...

I believe you are correct. How on earth would the IRS differentiate the original owner a decade plus later?

I have a client who is in this situation and has been writing off all capital gains for 20+ years. He has the assets, just rarely sells anything to recognize the gain.

[jklcpa]

No, that is not correct. It must be tracked by whose loss it is, even on a joint return.   On a joint return in the year of death, any loss belonging solely to the decedent can still be used if filing a joint return for that year, but the loss dies with the decdent and can't be used by the surviving spouse in future years.

This article from The Tax Advisor is good and covers the losses in the 3rd paragraph and then farther down discusses each type of loss carryover under separate bold headings also. https://www.thetaxadviser.com/issues/2017/jan/carryovers-death-spouse.html

[Catherine]

Except that many times those losses are from jointly held assets (JTWROS-titled accounts), and then the survivor does get to keep them as they are full co-owner.

[jklcpa]

Catherine, when owners of a joint account sustains a loss, it still must be track because 1/2 of a joint loss is attributable to each, and that amount that is attributable to the deceased IS lost in the year's subsequent to the year of death.  Basically, each person only gets their share of a loss.

In the case of the question posed, if the husband predeceases the wife, the joint return in the year of his death will be the final year that the loss carryover can be used since the property that generated the loss was titled solely in the husband's name. 

 

[Roberts]

You're right jklcpa. Didn't know this. I wonder how the IRS is going to figure out it isn't jointly owned when the item is 10+ years old and acquired while married? In the OPs case it could easily end up being a 20 year old issue.

If you acquire a property with marital assets while married, it's jointly owned property for legal purposes. Wonder if the IRS can really see that as owned by a single person. If in the OPs case he inherited while married, if he used marital assets to pay bills (taxes) on that property, it's considered a joint martial asset in my state (he didn't keep it 100% separate).

[jklcpa]

Roberts, I wondered if someone would bring up community property issues or divorce, and those are a whole 'nother ballgame.  I rarely have to deal with community property issues, so I would defer to others here that handle that on a more regular basis.

As far as this topic or tracking the losses over years, those are rules are covered in reg sec 1.1212-1(c) if you want to take a look at the examples included there.

Also pertaining specifically to this topic is a private letter ruling (PLR) 8510053, and the Rev Rul 74-175 cited in the article I posted.
For anyone that doesn't want to bother clicking the links, from the article I provided above, it says "Rev. Rul. 74-175 provides that capital loss carryovers expire upon a taxpayer's death and cannot be used on the estate's income tax return. The decedent cannot transfer a capital loss carryover to the estate because the decedent and estate are separate tax entities. A taxpayer's capital loss carryovers also cannot be transferred to the surviving spouse."

[SaraEA]

The $3k limit on capital loss carryovers began in the 1970s.  It has never been adjusted for inflation.  In today's dollars, it would be worth a heck of a lot more than that.  When it began, only rich people would have losses of that magnitude; in today's market you can lose that much in a week or day.  If investing in Bitcoin, in an hour.

Judy is correct that the loss belongs to the taxpayer and the spouse is not entitled to half.  It expires when the taxpayer does.  On the other hand, I agree that the IRS would never be able to figure that one out.

[Edsel]

Surprised to find out the capital loss attaches to the party creating it, and only half attaches to jointly owned property.  This means if we do our jobs the way the IRS wants us to, we have to continually track the source of these losses forever, or at least until one of the parties is deceased. 

And if there are multiple losses, some created by husband, others created by wife, and others created jointly, then we have a train wreck.  Imagine having to use "FIFO" on the losses, and eliminate first those that occurred earliest.

What if some of these multiple losses were available to offset capital gains during the period, but the gains were attributable to only one party?  The train wreck now becomes a total derailment.  And of course, if we walk into a situation like this with a new client, I'm sure the client is going to have this tracked before we take them on, right?

Without respect to the identity of losses, I had hoped to find there might be a way to pass on to the beneficiaries.  Looks like there is not.  Thanks to everyone for your interest in this topic and your contributions.

[RitaB]

1 hour ago, Edsel said:

Surprised to find out the capital loss attaches to the party creating it, and only half attaches to jointly owned property.  This means if we do our jobs the way the IRS wants us to, we have to continually track the source of these losses forever, or at least until one of the parties is deceased. 

I always print the worksheets (in ATX) for the lines on Sch D that show what's what and whose on Capital Loss carryovers and attach them to my copy and client copy. 

I don't print the crap worksheets like we've all seen that I can only assume are a way to justify fees by weight or something, but this information is important to have, just like depreciation schedules.  I know some think it gives you a chance to save a client from leaving if they call to ask for information because you didn't provide it.  Nah, they're gone.  I don't want to spend time sending these things later.  I have other things to do.  Like TV and food. 

[Edsel]

Who are we working for?

...when we run into situations such as above where additional research into dubious information is necessary to make sure the IRS gets what they think is "their" money?

The above "split" of capital gains/losses is potentially one of those situations.  Husband/wife have separate brokerage accounts, as well as one joint account, and the last 20 years is peppered with a mixture of capital gains and losses.  The husband dies, and you have to tell the wife as follows:

Preparer:  "You need to provide me with brokerage statements for the last 20 years."

Client:  "Why do I need this to do my taxes for the current year?"

Preparer:  "The IRS needs to know whether you are going to be claiming excess capital losses in the future which drop out because of your husbands death."

Client:  "So what is the final effect?  Will I owe any more money?"

Preparer:  "Probably.  It is definite you won't owe less.  And the extra 4 hours research will cost you another $300 in my fee."

Client:  "So you want to charge me another $300 to explore the possibility of me owing more money?  How will the IRS know the difference?"

Preparer:  "They won't.  In fact, they don't have a clue.  Only by my due diligence and subsequent disclosure will they know you owe more money, if in fact you do."

Client:  "Y'know Edsel, I don't think I would have to put up with this if I took my taxes somewhere else.  Who are you working for anyway, for me or for the IRS??  I don't think I want to dig out 20 years worth of statements and pay you an extra $300 for the honor of knowing I "might" owe some more taxes."

Preparer:  "Well Hortense, it is a matter of whether you want to be totally honest or not.  As a preparer bound by due diligence requirements of Pub 1230, I am obligated to dig further to find absolute truth."

Client:  "Sorry, I don't know Pub 1230 from the Irish Pub down the street.  I'm not a crook - I'm paying everything I know, and everything you know before you charge me another $300.  I'm going to Shifty-Eyed Sam across town."

In spite of all desires for compunction and the desire of the IRS to make auditors out of us, we do have to live in the real world whether it coincides with the loftiest ideals or not.

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