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Capital Losses – Tips on Effective Handling

Capital losses refer to the decrease in the capital assets’ value. It is what happens when the selling price is lower than the cost of purchase.


Capital Losses- Defining Losses for Effective Handling

Defined as short term and long term, capital losses can be claimed from the sale of real or financial assets. Short term ones are incurred on investments that are sold less than a year. Long term capital losses are the results of the sale after a twelve month period. To effectively handle such losses, it is important to note that only 50% of it can be claimed and only from investments within accounts that are taxable. They can also be claimed against capital gains within the current year up to three previous years or they can also indefinitely be carried forward. In the event of the taxpayer’s death, they can be claimed against his income for the year of his death.

Capital Loss Carryover - The Rules That Apply for Future Tax Years

As a general rule, there is a ceiling amount that can be claimed in one year, the excess of which becomes capital loss carryover. This means that it can be deducted in future years or offset capital gains. The capital loss carryover is considered long term if the net capital of the loss is more than its ceiling. In order to take advantage of a bigger amount to use in future years, one can use tax loss harvesting. However there are strict rules to be adhered in digging into capital gains and offsetting deductions to state income. It is thus best to seek the advice of a tax advisor for these matters.

Capital Loss Deduction- Important Rules to Remember

One of the salient rules that one should remember about capital loss deduction is it can be made only with investment property. This is apparently not permitted with personal residence property. Say for example one buys an apartment with the main goal to rent out its units and then later on sells the apartment building at a loss meaning with a lower value than its purchase. This is when one is entitled to capital loss deduction. However when a primary residence is sold at a price that is lesser than its purchase value, then such type deduction is not allowed.

Written by Lucy King

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