Jul 27, 2008

Q & A: Capital Loss Deductibility

QUESTION: I am the single owner of an LLC (rental properties). In 2006 I was in a partnership and filed what I think was a Schedule K. I bought out my partners' share at the beginning of 2007. So for my 2007 tax return my accountant said I should forgo the schedule K and just file the schedule E. As I remember, the Schedule K data went on a capital gains schedule. I have recently taken a bath on some stock sales and will have a big (for me) capital loss this year. I don't currently have anything to offset that loss against. I have no intention of risking further losses and thereby am sure that for this year I will have a capital loss of around $20K.
Is filing a K or E optional for a single owner LLC? If I can file K then I can offset some or all of my loss, right?

ANSWER: First of all, for tax year 2006 the LLC should have filed Form 1065 which would have generated Schedule K-1's for all of the partners. This form represents each partner's share of the business's profit or loss which is recorded on the partners' individual tax return. With the buyout at the beginning of 2007, your LLC became classified as a single-member LLC. For 2007, your rental property income and expense information was indeed eligible to be shown on Schedule E of your individual return.
Regarding the capital losses from sales of your stock holdings, net ordinary income from your LLC will not affect the ability to offset the losses from stock sales. The rule for capital losses is that they may be offset only by capital gains without distinction between long-term and short-term gains or losses. Additionally, the deduction for capital losses is limited to a maximum of $3,000 for any year that they exceed capital gains. Unused capital losses may be carried forward to future tax years until the entire loss is used. In your case, it appears that your capital loss deduction for 2008 will be $3,000 with the balance of your losses carried forward for use in future years.

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