When you sell a capital asset for less than its purchase price, the result is a capital loss. Your capital assets include all personal and investment property you own, except for those you primarily use in a business. Classifying the loss as long term or short term depends on your holding period from the date of sale. However, this holding period has no effect on whether you can claim a capital loss deduction.
Calculating Capital Loss
Calculating the amount of your capital loss requires you to identify the property's tax basis. A tax basis always includes the capital asset’s purchase price, but can include additional costs. For example, if you sell corporate stocks, the tax basis also includes brokerage commissions paid when executing the purchase and sale trades. However, if your capital loss is the result of a real estate sale, the tax basis equals the purchase price or the cost of constructing, most of the closing costs and the cost of home improvements. Once you add together all costs to arrive at the property's tax basis, the capital loss will be the difference between that figure and price at which you sold the asset.
Asset Holding Period
The IRS treats your short-term and long-term capital losses in the same way. Nonetheless, you must still determine each asset's holding period, which reflects the length of time you own the asset before selling it. Assets you own for one year or less are short-term capital losses. A long-term capital loss is when the holding period is more than one year.
Deductible Capital Losses
The IRS allows you to claim a tax deduction for both short and long-term capital losses when it relates to the sale of investment property rather than personal property. An investment property is any asset that generates income or is held for appreciation in value, such as stocks, bonds and investment real estate. However, investment property doesn't include rental real estate or the assets you use in a business. Your personal property, on the other hand, includes everything you own that doesn’t qualify as an investment, business or rental property. Common types of personal property include homes, cars, boats, trailers and household furnishings, to name just a few.
Maximum Capital Deduction
When reporting capital asset sales on Schedule D, you will combine all capital losses with capital gains to arrive at your overall gain or loss. Only when your losses exceed gains can you claim a deduction. The maximum capital loss deduction you can claim each tax year is $3,000. If loss remains after claiming the deduction, you can carry the balance forward to the next tax year.
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