Under Internal Revenue Service regulations, personal losses must be reported on the decedent’s final individual income tax return. The losses cannot be transferred to reduce the decedent’s estate or trust tax liability. The decedent’s estate or trust is recognized as a legal entity that is separate from the decedent. As such, losses cannot be transferred from one entity to another. Although personal losses must remain with the decedent, they can be used to offset the decedent’s personal tax liability.
The asset values used to calculate the final tax return are based on the decedent’s date of death. The date of death is the actual day the decedent died and is found on the death certificate. The date of death determines when control and ownership of the assets passed from the decedent to his estate or trust. For tax and accounting purposes, the assets are treated as if the decedent had sold them on the date of death. If the date-of-death value is less than the acquisition price, the tax return preparer reports a loss on the decedent’s tax return.
Reporting the Loss
If the decedent was married at the time of death and the asset is jointly owned, the surviving spouse is entitled to use the losses to reduce the tax liability on the joint income tax return. Personal losses from investments such as stocks and mutual funds are passive losses and reported on Schedule D. The short-term and long-term losses are calculated separately and matched against short-term and long-term profits. The difference between the profits and losses are reported on the joint tax return. If the decedent was single, the net profit or loss is reported on her individual tax return.
Unused Personal Losses
At the time of publication, the net passive loss is limited to $3,000. Under IRS regulations, any passive amount exceeding the $3,000 cap is lost. It cannot be used to offset actively earned income from such activities as managing real estate holdings. Furthermore, the unused personal loss amount cannot be transferred over to reduce estate or trust taxes. In addition, a surviving spouse cannot use the excess passive loss to reduce the joint personal tax liability over the IRS cap amount.
Net Operating Loss
Although a personal net operating loss cannot be transferred to an estate or trust, it can be used to reduce the decedent’s personal tax liability. The decedent has a net operating loss when his tax deductions are greater than his income. Under IRS regulations, the tax preparer can carry the net operating loss back for two years before the net operating loss occurred. This reduces the decedent’s tax liability for those two years and could result in a tax refund. However, the net operating loss cannot be carried forward past the year of the decedent’s death.
- IRS Publication 544: Sales and Other Dispositions of Assets, 4. Reporting Gains and Losses, Treatment of Capital Gains
- North Carolina Estate Planning Law Firm: How to Determine Date-of-Death Values
- IRS Schedule D: Capital Gains and Losses
- IRS Publication 536: Net Operating Losses (NOLs) for Individuals, Estates, and Trusts
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