If a person has a capital loss carryover balance from 2019 but passes away in 2020, can the entire remaining balance be claimed as a loss on his 2020 taxes?

[akdagnabbit]

And if not, how much can be claimed for 2020 and will taxes need to be filed each year on the deceased person until the loss balance is zero?

[Carl]

I'm sorry for your loss. If the deceased person passed away, is this property being inherited by someone? Usually someone specified in the will of the deceased, or to a descendant in accordance with state law.

Additionally, I assume the deceased person's estate (they have an estate, since they have property) went into probate, which usually requires the deceased person's assets to be transferred to an estate. Then the legally recognized/appointed administrator of that estate is required to file a "final" 1040 for the deceased, covering everything up to the date of their passing, and transfer everything into the estate. Then the administrator would be completing a 1041 Estate return.

Basically, the carry over losses carry over to the estate and included on the estate return. How those losses are dealt with on the estate return, depends on how the dissolution of the estate is handled.

Have you considered seeking professional help on this? If the residence of the deceased was a state that taxes personal income, things can get quite complex. So professional help might be the more cost effective way to go here.

[tagteam · Accepted solution]

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@Carl wrote:

Basically, the carry over losses carry over to the estate and included on the estate return. How those losses are dealt with on the estate return, depends on how the dissolution of the estate is handled.

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No, capital losses do not carry over to the estate. 

Rather, any capital losses of the decedent are first used to offset capital gains on the final income tax return of the decedent. Thereafter, up to $3,000 of excess capital losses can be used to offset all other types of income. Any net losses that exceed that $3,000 are simply lost - forever.

The assets in the estate are stepped up (or down) to their fair market value on the date of death of the decedent. Again, unused net capital losses (the amount that exceeds $3,000) disappear. 

[Carl]

unused net capital losses (the amount that exceeds $3,000) disappear.

Ah yes! They "kinda" get absorbed by the step-up in basis anyway.

[Mike9241]

Generally, carryovers can be used on the decedent's final income tax return but are lost thereafter. For a single taxpayer, this is fairly straightforward. It is more complicated when the decedent is married and files jointly. When the surviving spouse files a joint return with the decedent for the year of his or her death, the full amount of carryovers can still be used in the year of death, even if they are used to offset income of the surviving spouse that was generated after the death. However, after the year of death, the carryovers must be examined carefully to determine which carryover amounts, if any, belonged to the decedent, because any amounts attributable to the decedent are lost and cannot be transferred to the surviving spouse.

[tagteam]

There is a misconception that there is always a step up in basis, but it works both ways. 

For example, if the decedent paid $300,000 for a house and died owning that house at a time when it had declined in value to $275,000 on the date of death, then the basis (as acquired from a decedent) is $275,000.

Another example that is relevant here is this: If the decedent had a $50,000 capital loss carryover from 2019 to 2020 and had $30,000 in capital gains prior to passing in 2020, then of the $20,000 net capital loss, $3,000 could be used to offset other income; the remaining $17,000 is lost.