Don’t Burn up Your Loss Carry-Overs on Real Estate

real estate loss carry-over

Sometimes taxpayers opt not to conduct a 1031 exchange because they have prior loss carry-overs that can be applied to reduce their tax liability. 

What is a Loss Carry-over?

If in the past a taxpayer has sold a capital asset for less than their adjusted basis, this results in a capital loss. If the taxpayer is unable to take advantage of the loss with a corresponding tax deduction for the entire amount for the current tax year…then that loss (lingering or pending tax deduction) can be carried over into future tax years.

Keep your Powder Dry

Loss carry-overs are valuable tax attributes because they can be used in the future to offset future income (this is especially so if tax rates increase). Generally, I tell people to save their loss carry-overs for gains that cannot be deferred, and indefinitely defer the real estate gains through a 1031 exchange, especially if they own other assets such as stocks.

Always Exhaust the 1031 Option First

If the taxpayer is inclined to buy more real estate anyway, it may be prudent to set up a 1031 to keep their options open for 45 days to see what they want to do, and if they want to identify any replacement properties.

You Gotta Know When to Hold'em

Sophisticated taxpayers and their tax advisors know that it is better to not burn up their loss carry-overs without considering an alternative that allows them to defer their gains and also keep these valuable tax attributes (to use against other future gains).

Defer, Defer, Defer…Die

Because of the step-up in basis, the ability to refinance replacement properties (to pull out equity tax-free) and the long duration that 1031 properties can be held (until after the death of the taxpayer), it is prudent to consider all of the alternatives before playing the loss carry-forward card on real estate.

  • 1031 Hotline: If you have questions about real estate loss carry-overs, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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