1.8 Losses: Deductions and Limitations

1. Net capital losses

1) Definition of capital assets

2) Netting procedures of capital gains and losses
Form 8949: Sales and Dispositions of Capital Assets - Schedule D

3) Net capital gains rules
(a) Long term: more than one year, 15% tax rate
(b) Short term: one year or less, ordinary income

4) Net capital losses rules
(1) Offset against capital gains (Schedule D)
(2) Offset ordinary income to a $3,000 maximum (Schedule 1)
(3) Carry forward an unlimited period

2. Sale or exchange of securities

1) Worthless securities: as if they were sold on the last day of the taxable year

2) Small business stock
(1) Sec. 1244 stock: losses as ordinary losses (up to $50,000)
(2) Sec. 1202 stock (more than 5 years): gain 100% exclude from GI

3. Net passive activity losses

1) Definition of passive activity - any rental activity / not materially participate

2) Passive activity loss rule (PAL rule) - only offset passive income
Nondeductible PALs carryforward - carry forward without any limit

3) Taxpayers subject to PAL rule - individuals, personal service corporations, closely-held C corporations

4) PAL (disallowed net loss) exceptions
(1) Mom and pop exception - $25,000 deduct is the individuals are actively participating
The $250,000 is reduced by 50% of the amount by which adjusted gross income exceeds $100,000.

(2) real estate professional (not passive activity)