How to Claim Capital Losses In a Tax Return

Anytime you sell an investment for less than you paid to acquire the asset, you’ll generate a capital loss.

With income-producing investment real estate, you are allowed to deduct capital losses on your tax return – with limits. Like capital gains, capital losses are divided into short- or long-term depending on how long you held the property.

Let’s jump into the basics on how to claim capital losses on your tax return. We’ll provide an overview of how the process works, but investors should consider discussing their particular tax situation with a certified tax professional.

Capital Losses Explained

Capital losses can occur on the sale of investment properties, as well as mutual funds, bonds, stocks, and cryptocurrencies. While these losses are tax deductible, investors are limited to using them to offset any realized capital gains, or to lower their gross income for a given tax year.

Additionally, you have to use short-term losses to offset short-term capital gains, and long-term capital losses to offset long-term gains since the two are taxed so much differently. However, if you realize an overall capital loss for a given tax year, you are allowed to deduct as much as $3,000 against ordinary and other forms of income. Investors can carry over any capital losses into subsequent years that can be used to offset capital gains, or claim the same $3,000 deduction against income. Note that the $3,000 capital loss deduction is halved for taxpayers who are married but file separate tax returns.

You can only claim realized capital losses on investment properties that have been sold for a loss – a perceived drop in asset value due to adverse real estate market conditions doesn’t qualify as a capital loss.

Deducting Capital Losses on Your Tax Return

Follow these steps in order to claim capital losses on your tax return.

• Review Form 1099-B or 1099-S when you receive them after the start of the new year. The first is for proceeds earned through broker transactions; the second is for proceeds from real estate transactions. You may have multiple Form 1099-Bs if you transacted with multiple financial institutions or brokers.
• Next you’ll use Form 8949 to report sales and exchanges of capital assets. This form will allow you to categorize transactions into either short- or long-term capital losses or capital gains. Remember, a long-term gain or loss is for assets held for a year or longer, while a short-term gain or loss is for assets held for less than 12 months.
• Once your transactions are categorized, you’ll record them on Schedule D on your Form 1040. Long-term losses can be used to offset long-term gains, and short-term losses can be used to offset short-term gains. Once this step is complete, you’ll be able to determine whether you have a net gain or loss for the year.

Any net losses that exceed your net gains can be carried forward into subsequent tax years. Here’s an example of how it might look:

Last year you divested some investment properties and realized the following:

• Short-term loss of $10,000
• Short-term gain of $0
• Long-term loss of $750
• Long-term gain of $4,000

Your total long-term gains for the tax year are reported as $3,250 ($4,000 gain minus $750 loss). Your short-term losses are $10,000. Your net loss for the year is $6,750 ($10,000 loss minus $3,250 gain). This amount will wipe out any taxes that would have been due on the long-term gain of $4,000, but you’ll have to claim it over several tax years since you are only permitted to claim $3,000 of capital losses each year. In years 1 and 2, you’ll be able to deduct $3,000 against ordinary income, while in year 3 you’ll deduct the remaining $750 – provided you have no additional capital losses or gains reported in those subsequent tax years.  

Putting it all Together

Deducting capital losses on your tax return can soothe some of the financial pain from losing investments. While we’ve provided some information on capital loss deductions, taxpayers should consider engaging a tax professional to determine the best course of action for their particular situation.