Much of the discussion on tax planning in the year of death has been focused on terminal year capital gains. In a recovering market it is also possible for the deceased to suffer a capital loss on the deemed disposition of capital assets.

There are two ways in which net capital losses incurred in the year of death may be claimed. Apply the net capital loss to reduce any taxable capital gains from three years before the year of death. Utilized amounts may be used to reduce other income on the final return and the previous year’s return subject to reducing the loss by capital gain exemptions claimed.

Alternatively, an executor may choose to not apply the net capital loss to reduce taxable capital gains from earlier years. The executor will simply reduce other income on the final return and the previous return, subject to reducing the loss by capital gain exemptions claimed. Net capital losses incurred before the year of death may be applied against taxable capital gains on the final return, other income on the final return and the preceding year’s return – subject to reducing the loss by capital gain exemptions claimed.

Furthermore, net capital losses from 1988 to 2000 must be adjusted to coordinate with the 50% taxable capital gain/allowable capital loss rate for 2001 onwards.

Be sure to explore the available options with capital losses in the terminal tax return.