capital losses

[lazygood4nothinbum]

having trouble understanding a wiki sentence

If the losses exceed the gains, then up to $3,000 may be deducted to offset federal tax on ordinary income each year

assuming the inherited house ever sells, say i wind up with a capital loss of about $200k (my share of loss based upon value of house at inheritance minus value at sale), does that mean that i carry over for the next 66 years $3k/year as a capital loss offset?

and how would that work. suppose i live overseas withdrawing $36k/year and say i pay 11% federal income taxes. does the $3k come off the top of my taxes so that i'd wind up paying just $960/year in taxes or is that $3k subtracted from the $36k income so that i'd pay $3630/year in taxes?

please explain this to me in layman's terms as i'm a financial idiot. thank you.

 

[youbet]

I think I know the answer.........

The $3k would come off income, the balance would be carried over to the next year.

In your example, if the $36k was actually income (not just withdrawings from savings), the $3k would be deducted from that. The $3k is not a credit against taxes.

In your case, I don't think you'll be able to use the loss on the house as a capital loss deduction. I don't think real estate applies. But, not completely sure. I'm sure someone will quickly verify one way or the other.

Good luck on getting the house sold.

 

[Moemg]

Inherited real estate definetly applies to capital losses .My late husband inherited a house valued at $450,000 at time of his dad's death .House sold for $375,000 so the $75,000 was a capital loss .We took a $3,000 loss against our gains for years .

 

[Martha]

I agree with Moemg. If inherited property is NOT converted to personal use it is considered investment property. Therefore, if it is sold at a loss you will have a capital loss. You will first offset it against any capital gains. If your capital gains don't use up the loss, you can deduct up to $3000 a year against your other income, like interest income or wage income. The next year, again you can offset against any capital gains and again up to $3000 against your other income to reduce that income.

Here is a link with a good explanation: Capital Gains and Losses 101

 

[lazygood4nothinbum]

thanx all. house is not used personally, except to make me very depressed apparently. it's just sitting there waiting for the rare buyer.

martha, that's a great site for info. thanx. this i didn't understand but fairmark explains pretty well...

As a general rule, you can deduct capital losses up to the full amount of your capital gain plus $3,000.

good to know a loss at least isn't a total loss. another future entry for turbotax.

 

[youbet]

I agree with Moemg. If inherited property is NOT converted to personal use it is considered investment property.

Glad to hear that! I wasn't the least bit sure about the "converted to personal use" part. Sounds like LGFNB will at least benefit from the capital loss.

 

[lazygood4nothinbum]

i love this also from fairmark

If you have large capital losses and capital gains, it can be helpful if they fall in the same year. That way you don't have a big hit of income — and tax — in one year. You especially want to avoid having your large losses fall in a year after your large gains, because losses carry forward but not back. Remember that you can only deduct $3,000 of capital loss in excess of capital gain.

so by conveniently falling down at the start inheritance i'm coincidentally ahead of the tax race. oddly of little comfort.

edit:

found something else i don't understand. do i determine when capital losses are reported (since they can be carried over year after year) or are they automatically deducted from capital gains as the gains occur per this from fairmark:

Except when you're trying to soak up a big capital loss, you generally want your long-term gains to fall in years when you don't have capital losses (short-term losses or long-term losses). Isolating your long-term gains in this way will maximize your use of the favorable rates on long-term gains.

Example: During 2003 you have $3,000 of capital loss (it doesn't matter whether it's short-term or long-term). You also have a $3,000 long-term gain you can take in 2003 or hold until 2004. If you postpone the gain until 2004, your 2003 loss will reduce your tax on ordinary income (wages, interest or dividends, for example), and your gain will be taxed the following year at the favorable rate for long-term capital gain. But if you take your capital gain in 2003 it will swallow up the capital loss and you won't get the benefit of the favorable capital gain rate.​

seems especially relevant during 2008-2010 since below 25% bracket gets 0% cap gains tax. what a waste of previously incurred capital losses if they only offset gains which are taxed at 0%.

 

[kaneohe]

My impression is that you, unfortunately, do not have discretion in the timing of
using your CG loss carryovers but must use them as the CGs occur. Would be nice
to be able to do as you are thinking.

 

[Life_is_Good]

What about capital losses inside a Roth IRA mutual fund account? Are they deductible on current year taxes.... or could they be deferred?

 

[lazygood4nothinbum]

My impression is that you, unfortunately, do not have discretion in the timing of using your CG loss carryovers but must use them as the CGs occur. Would be nice to be able to do as you are thinking.

bummer, but thanx for the reply.

What about capital losses inside a Roth IRA mutual fund account? Are they deductible on current year taxes.... or could they be deferred?

on a tira i don't think cap gains or losses apply because that's just taxed as income on withdrawal so seems they wouldn't apply to a roth either.