Offsetting Losses Against Gains | USTaxAid

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Offsetting Losses Against Gains

Written by Diane Kennedy, CPA on December 25, 2021

Jason had sold a real estate property he’d owned for about 5 years and made $200,000 in gain near the end of 2021. He had a business that had struggled in 2021. He needed to buy some business equipment and was looking at a new business truck.

His main question had to do with whether he could buy the equipment and the truck to deduct against the business income. It would create a loss in 2021 from the business.

Actually, he already knew that he could deduct those items, but he did have a question about buying a heavy vehicle versus a “regular” vehicle as far as deduction. That was more of a strategy question, though. Which was it better to do?

His question, the one that he couldn’t seem to get an answer to, had to do with the business loss. Could he deduct the business loss against the capital gains from the real estate sale?

It wasn’t a hard question, so I was curious why he hadn’t gotten an answer. Jason had run into the problem that is facing a lot of taxpayers this year.

The IRS isn’t available to answer questions. His CPA retired and he hadn’t been able to find anyone who had experience with real estate tax strategies to help him.

In 2021, more tax professionals retired or semi-retired by cutting way back on clients than had ever retired in one year before. And Jason was feeling the pinch of that, right at December when he needed to do some planning.

First of all, we talked about the gain he had. There was approximately $7,500 of depreciation that would need to be recaptured. If the gain, after deducting basis and the cost of sale was exactly $200,000, then $192,500 would be taxed as long term capital gains, capped at 20%, and $7,500 would be capped at the higher depreciation recapture rate of 25%. 

It looked like Jason could accelerate some purchases to take the bonus depreciation in his business. If he did that, his business loss would be approximately $100,000.

A heavy vehicle that is used 100% for business is completely deductible by using the bonus depreciation in 2021. If it was used only 80% for business, as an example, then it would qualify for 80% deduction of the purchase price. A heavy vehicle is defined as a vehicle that has over 6000 GVWR. Typically that is a larger SUV or 4×4 pick up truck. The dealer would know the GVWR, or Jason could find out online.

Otherwise, he could take a deduction of up to $18,200 in the current year if the vehicle is 100% used for business and is not a heavy vehicle.

Jason was pretty sure that he knew the answers so far, but that’s when he got into trouble. So far, he hadn’t gotten an answer on what happened with capital gains. 

Capital Gains is Bigger Than Taxable Income

His taxable income would be approximately $80,000 (after taking his personal deductions and deducting the business loss), but capital gains was $200,000. 

Jason was happy to learn that the business loss is allowed against the capital gains income. The most he will pay tax on would be the $80,000. Of that, $7,500 will be taxed at the depreciation recapture rate and the rest, $72,500, will be taxed as long term capital gains. 

Business Gain/Loss and Capital Gain/Loss

A business loss can offset long term capital gains. Let’s look at a couple more example of how that could work.

Let’s say you have gain from a sale of a property of $100,000. You also have accumulated depreciation of $40,000. That means $40K would be taxed at the depreciation recapture rate and the difference is long term capital gains, or $60,000 at the capital gains rate.

Now let’s say you have a big business loss and so your taxable income is $60,000 in total. You will pay $40K of that at the depreciation recapture rate and the rest, or $20,000, is at the capital gains rate.

Let’s say the business loss is even bigger and you have taxable income of $30,000. All of it, or $30K, is taxed at the depreciation recapture rate. There would be no capital gains that is taxed and the rest of the depreciation that would need to be recaptured is ignored. 

Unfortunately, capital losses can’t offset business (or other types of) income.

Let’s look at another example. Let’s say you have business income, or other earned income, and a big capital loss. In that case, the capital loss can be used against capital gains and then you can only take $3K of loss against other income. The remainder of the capital loss can be rolled forward to be used in future years. The same is true in the next year. Use capital loss to offset capital gain and then take another $3K of loss against other income. 

Got a tax question? You can search the Internet and hope you find someone who knows what they’re talking about and that the information is current.

Or you can get your question answered  at USTaxAid, through the Wednesday Coaching program or private consultation. There are a limited number of consultations each month. There are additional consultations “released” for sale at the first of each month. Wednesday Coaching, however, can be joined at any time. Classes are on the 1st – 4th Wednesday of each month at 5 pm Pacific.

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