Not Carrying Over Capital Loss

[Jim M]

How do I not carryover a capital loss?  The taxpayer died in 2018 (Dec 1st) and the loss was in a revocable trust that converted to a irrevocable trust upon his death.  The new irrevocable trust did not earn more than $600 for the last month of the year.  I figure I'm going to have to file a Form 1041 for 2019 that will include the income and final Schedule K-1.  

[tagteam]

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@Jim M wrote:

How do I not carryover a capital loss?  The taxpayer died in 2018 (Dec 1st) and the loss was in a revocable trust that converted to a irrevocable trust upon his death.

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Basis rules apply (see IRC §1014); the basis of all assets become the fair market value on the date of death of the decedent.

Of course, that cuts both ways - good if there were a lot of unrealized gains, bad if there were unrealized losses.

[Jim M · Accepted solution]

It looks will have to take the $3000 and the rest is lost.

[tagteam]

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@Jim M wrote:

It looks will have to take the $3000 and the rest is lost.

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I am not sure what I wrote was clear; you cannot even take the $3000 as a loss if it was an unrealized loss on the date of death.

Example: Taxpayer pays $10,000 for shares in a mutual fund. Taxpayer later dies still holding the shares which have declined in value to $5,000 on the date of death, for a $5,000 unrealized loss. The result is the new basis of the shares is $5,000, while the $5,000 loss is wiped out (unusable).

[Jim M]

The loss had occurred earlier in the year.

And since he died near the end of the year, there was less than $600 of income during the final month which means I do not have to file a return for the irrevocable trust for 2018.

Next year is another matter.

[tagteam]

If the loss was realized while he was alive, then it belongs to him (i.e., is reported on his final return). 

Since this is a trust, not an estate, the filing threshold is gross income of $600 or more or any taxable income for the tax year. 

See https://www.irs.gov/instructions/i1041#idm140630132225648