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If the investment account was joint and originally funded jointly, half of the carryover losses belong to the surviving spouse and can be used on his or her future returns. The deceased spouse's half is lost forever after the final return. Many of us still have clients who lost a fortune in the 2008 market crash, pulled out of the market altogether, and will have to live to be 200 to use up the losses at $3k per year. That $3k limit has been around since 1978 and never adjusted for inflation.

But not unexpected or surprising.

https://www.thetaxadviser.com/newsletters/2020/mar/married-taxpayers-jointly-owned-business/ @DANRVANThis is a second article from The Tax Advisor that disagrees with your interpretation by saying that MMLLCs are state entities that do not qualify to make the 761(f) election, and that goes on to make the separate point of an exception to those in community property states. I would still tell the OP to file a 1065. In Argosy, the court didn't need to consider that it was an LLC or not because there were previous filings as a partnership. ----------------- As to your H-W rentals in your state and the audit you mentioned, not all auditors are that good. Are these in LLCs? Even if not, did you make a 761(f) election for them? Do you check for material participation of EACH party each year without attribution of the participation of each to the other? Also from the same Tax Advisor article:

That's correct. What this means is that the final 1040 can show up to a $3,000 loss (just like usual) and any remaining loss carryover is lost. The planning opportunity mentioned is where a surviving spouse can sell capital assets having a gain in that year of death so that the otherwise unused losses would offset those gains. Example: your client is allowed $3K of losses allowed in the current year and $25K losses unused that are going to be lost. The taxpayer (prior to death) or surviving spouse any time during that year, if filing MFJ, could have sold other capital assets having GAINS up to that $25K with no additional tax effect. If single, that client could have done that in prior years or in the final year prior to death to use up the losses so that they aren't lost. For a single taxpayer where someone has a POA and is aware of the situation, that person could so initiate such a sale of capital asset prior to the taxpayer's death.

Trust was setup years ago. LLC was just setup last year and owns the rental. I got the EIN letter from the client, they state 1065 as the expected form filing.

No, the losses in year of death are handled like any other year. Any capital losses that are unused (those that would carryfwd if the person lived) are lost. They die with the decedent.

Honestly for the last several years, my experience once I have reached an IRS employee has been satisfactory. Does it take too long to get someone on the phone ? Yes it does. Does it take too long for them to find an answer or to change something in one of their programs? Yes it does. However given the old systems they are still working with that don't share information, I think they are doing the best that they can under difficult circumstances.

It used to be the an individual could get an FEIN. That way, no LLC needs to be formed with whatever state fees are due at formation &/or annually to SoS &/or DRS.

Copied from the TIGTA Report "FY 2023, cases worked by TAS generally met its acceptance criteria and taxpayers’ issues were fully addressed. However, we found TAS case advocates did not timely contact taxpayers or their representatives in 103 (63%) of the 163 closed cases we sampled. The initial and subsequent contact delays for these cases totaled an average of 146 calendar days late." "The National Taxpayer Advocate stated that TAS case advocacy is facing three challenges: rising case volume, new staff, and outdated systems." Well, this is really discouraging