His Wife Had $60,000 of Capital Losses Saved Up to Offset Future Gains. When She Dies, Only the Part Used on Their Final Joint Return Survives

A widower going through last year’s tax return finds a line on the capital loss carryover worksheet. It shows $60,000 in losses his wife saved to offset future gains, and it’s easy to assume that balance simply becomes his.

The federal rules for a capital loss carryover at death work differently. She can use her unused losses on the final return for the year she died, and that return can be a joint return with him. Whatever is left of her share after that return expires.

How Her Saved-Up Losses Worked While She Was Alive

A capital loss happens when an investment sells for less than it cost. Losses first offset capital gains, the profits from selling investments. If losses exceed gains, the excess can reduce ordinary income like wages or pension payments by up to $3,000 a year, or $1,500 for a married person filing separately, under 26 U.S.C. § 1211(b).

Anything beyond that rolls into the next year under 26 U.S.C. § 1212(b)(1), and it keeps rolling as long as the person who took the loss is alive. 24/7 Wall St. has covered how those carryovers work during life, and this piece covers what happens to them at death.

What IRS Publication 544 Says About Death and Carryovers

The IRS states the rule clearly in Publication 544: “Capital losses cannot be carried over after a taxpayer’s death. They are deductible only on the final income tax return filed on the decedent’s behalf.” The same passage says the annual limit still applies and the estate can’t deduct or carry over the difference. A CPA Journal column published this month traces the rule to Revenue Ruling 74-175. The ruling makes the losses deductible only on the individual’s final return, and the estate can deduct none.

The expiration applies only to the part of the carryover that traces back to her. On a joint return, Publication 544 treats spouses’ gains and losses as if they belonged to one person. Once the surviving spouse files alone, only the spouse who actually had the loss can deduct the joint carryover. Treasury regulation 26 CFR 1.1212-1 splits carryovers between spouses based on each one’s own net losses in the year the losses occurred. If some of the $60,000 came from his accounts, he keeps that portion.

Which Surviving Spouses Face This Deadline

The rule matters for a surviving spouse whose late husband or wife had an unused capital loss carryover. When he files a joint return for the year of death, the full carryover is still available that year, even against income he earns after she died, according to a 2017 Tax Adviser column.

A carryover made up entirely of his own losses keeps rolling forward under the normal rules. Couples where neither spouse has a carryover have nothing at stake here.

Ways to Use Her Losses Before December 31

1. Trace each loss back to the year and account that produced it, so he knows how much hers is.
2. Check the basis reset. Under 26 U.S.C. § 1014(a)(1), property passing from a person who died generally takes a new cost basis equal to its value on the date of death. In common law states, only half of property spouses own as joint tenants with right of survivorship or tenants by the entirety goes into her estate under § 2040(b), so only her half resets under § 1014(b)(9). Community property states differ: § 1014(b)(6) can reset the survivor’s half too, as our recent piece on a California couple’s house explained. Her own appreciated assets may already have their gains eliminated, so the gains left to harvest are often his.
3. Realize gains in the year of death. Gains he takes that year, on his own assets or joint assets, can be offset by her losses on the joint return. The CPA Journal column notes that a survivor can sell and potentially repurchase positions, increasing the cost basis of the shares bought back.
4. Compare outcomes. Assume all $60,000 is hers. If he takes no gains, about $3,000 offsets ordinary income and $57,000 expires. If he sells holdings with $40,000 of gains, $43,000 gets used and $17,000 expires. Gains of $57,000, plus the ordinary income deduction, would use the whole carryover.

Why a Late-Year Death Leaves Little Time

All of this has to happen in the calendar year she died. A death early in the year leaves months to plan sales. A death in late November leaves a few weeks. Gains he takes in January of the following year land on a return where her losses no longer exist, and they get taxed under the normal rules. This expiration is one of several IRS rules that quietly remove six figures from retirement accounts, and we detailed the rest in a free tax trap guide.

He should call his tax preparer before December 31 of the year she died. The preparer can confirm how much of the carryover is hers, which assets got a new basis, and how much gain he would need to take to use her losses before they expire.

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