A colleague of mine recently blogged about two ways for an estate to reduce its tax bill with the filing of a separate “Rights and Things” tax return for the year of death and the application of estate capital losses against capital gains in the deceased’s final tax return. There is another opportunity to save tax in the final tax return with unused capital losses.
In life, one can’t normally apply capital losses resulting from the sale of securities, real estate or other investments against income sources unless that source is in the form of gains from the sale of capital property. Unused capital losses can be carried forward forever but are of no use unless capital gains arise in the future.
In death, alas there is some relief in that the executor of the deceased can deduct unused or unapplied net capital losses against all income in the deceased’s final return, thus reducing the amount taxes owed. The available net capital loss must be reduced by any capital gain exemption claims by the deceased during his or her lifetime including those that might be made in the year of death.
So when consulting with your advisor on the preparation of the deceased’s final return or in the subsequent year (1st year of the estate), look for the unused capital losses if you can.