Capital Loss

[Earl]

Have married clients who have been deducting carryover capital losses for several years and will be doing so for quite a few years - loss was over 60k.

The asset that brought the loss was in a joint account with husband and wife both named on the account. However, 1099B was in husbands SSN.

The husband is not expected to live through this year due to illness.

Going forward can wife continue to claim the carryover losses. All or portion?

[Burke]

Time for some tax planning. She will only be able to carryforward 1/2 of jointly-owned losses. They will file a joint return for this year regardless if he dies in 2012, and be able to deduct the full $3K. Next year, she will still be able to deduct $3K, but only on half the amount.

So, are there any jointly-owned gains they can take to offset these losses this year? And is it a good idea? Keep in mind she will only receive 1/2 stepped-up basis on the appreciated assets. Which is better? You will have to run some numbers if there are any options.

[Gary2]

Time for some tax planning. She will only be able to carryforward 1/2 of jointly-owned losses. They will file a joint return for this year regardless if he dies in 2012, and be able to deduct the full $3K. Next year, she will still be able to deduct $3K, but only on half the amount.

So, are there any jointly-owned gains they can take to offset these losses this year? And is it a good idea? Keep in mind she will only receive 1/2 stepped-up basis on the appreciated assets. Which is better? You will have to run some numbers if there are any options.

I believe that "jointly owned" is the key phrase here, along with the intent being that the account would be treated as 50/50 ownership.

However, it's not entirely clear to me that the gains must be jointly owned in order to offset the losses on a joint return. For example, suppose A has $60K in carryover losses, A marries B, B is the sole owner of an account that generates $30K in gains over the years of the marriage. As far as I know, B's $30K gain can be offset by A's carryover losses for the years they file jointly, along with the annual $3K that can be applied against the ordinary income of either A or B. If they later divorce (or even choose to file separately), only A can use the remaining carryover loss.

In this case, if there are any appreciated assets owned entirely by the wife (and thus not eligible for the stepped up basis), my take is that those could be good candidates for sale, in order to lock in the available loss. And since the wash sale rule doesn't apply to selling at a gain, there's no reason they couldn't be purchased back immediately (assuming they're securities or other items with a ready market, so that it's not a sham sale).

[Burke]

I believe that "jointly owned" is the key phrase here, along with the intent being that the account would be treated as 50/50 ownership.

However, it's not entirely clear to me that the gains must be jointly owned in order to offset the losses on a joint return.

They don't, and I should not have said "jointly-owned" gains. (In fact, I had to re-read my post to see what you were talking about.) Any gains of either spouse can be used to offset these losses while they are still filing a MFJ return. What I was getting at is, if there are any assets in this jointly-owned account (or elsewhere) which can be sold at a gain now -- is it better to do so in 2012 to take advantage of some of the suspended losses -- or since 1/2 of the jointly-owned assets will get a stepped up basis, should they be held for sale in a later year at a lower capital gain calculation either by the spouse or future heirs? If carryover losses are reduced from $60K to $30K, it will still take 10 years for the spouse to use it all, if nothing else affects the Sche D. It will depend on her future tax liabilities as well as their tax liability this year.

[Burke]

In this case, if there are any appreciated assets owned entirely by the wife (and thus not eligible for the stepped up basis), my take is that those could be good candidates for sale, in order to lock in the available loss. And since the wash sale rule doesn't apply to selling at a gain, there's no reason they couldn't be purchased back immediately (assuming they're securities or other items with a ready market, so that it's not a sham sale).

And I agree with this.

[Earl]

Thanks all.

[appelman]

Just a quibble.

Is this a community property state? If so, and if the property is held as community property, she will usually get the full step-up in basis.

[Earl]

Not community property state.