Tax Tip 188: Use Capital Losses Quickly – Recycle debt + death

Some people have carried forward capital losses. These losses can usually be carried forward until the taxpayer has a capital gain which can ‘soak up’ the capital loss.


I think it is a good idea to use up these losses as soon as possible.

The main reason being that losses are ‘lost’ at death. If the taxpayer dies their loss cannot be passed on to any other person who could utilise it. Don’t lose a loss!


Example

Bart bought a property in a mining town for $1,200,000. He ended up selling it for $700,000 and has a carried forward capital loss of $500,000.

Bart dies and leaves a rental property that he owns to his sister Lisa. The property has a $500,000 capital gain.

Unfortunately, Bart’s loss will not benefit anyone. Lisa will inherit the investment property pregnant with a $500,000 gain, yet she cannot benefit from the loss.

Had Bart sold the investment property before his death he might have made $500,000 tax free and this money could have been passed onto Lisa. He might have even sold the property to Lisa – perhaps with vendor finance if she couldn’t have afforded a loan. Also, if Bart had a flexible will his estate could have sold the property and possibly used up the gain.


Another reason to use up capital losses is their benefits with debt recycling. Making capital gains without needing to pay tax will mean there is more money with which the non-deductible debt can be reduced.


Example of Debt Recycling

Lisa has a $100,000 capital loss from some bad share investments many years ago. Because of this she has a large amount of debt still outstanding on her main residence. But this has not stopped her investing in shares again. She has learnt from her mistakes and is now making some good capital gains.

If Lisa’s shares increased in value by, say $20,000 in the first year, she could sell these shares, pay no tax, and use the proceeds to pay down the non-deductible debt, and then invest in more shares and repeat.

Doing this has 2 advantages

a) It uses up the loss, and

b) It produces tax free capital gains which can then be used to pay off the non-deductible debt quicker.

Originally published at Tax Strategy: Use Capital Losses Quickly – Recycle debt + death – The Structuring Blog

 

Great article Terry.

Do you have any suggestions for using capital losses quickly if there is no non-deductible debt? Say Lisa, in the example above, has already paid off her PPOR.

 

It would depend on the circumstances really

 

Whether debt is deductible or not wont impact the CGT issue referred to. They are independent of each other.
That said I have seen people chase a CGT gain to have increased CGT losses.

The primary beneficiary of the CGT loss issue is commonly self funded retirees. They hold their shares. They avoid CGT profits. Yet they often sell down duds or have sales imposed on them in a takeover or other corporate action. So they have CGT losses. If they calculate the CGT loss and sell down sufficient shares to soak up that loss its a wise strategy. I have seen people with a few grand of CGT losses and others with tens of thousands of dollars - One had $300K. They literally sold most shares on their death bed to assist the beneficiary. (Since the beneficiary would likley inherit the shares at the taxpayers original costs and the CGT loss is...gone)