Tax Loss Harvesting - Timing and Planning Are Key

As your financial advisor will tell you, whenever you have significant losses in a portfolio of assets, you have the opportunity to take advantage of tax loss harvesting.  This is a fundamental part of tax planning and is a tactic you can use to help offset taxable income or a capital gain.

The key to maximizing this benefit, though, is that other planning staple: Timing. How does this potential write-off fit into your more strategic tax planning outlook? You may have income against which to set that loss this year, but it may be a better choice to hold the loss on the books instead of cashing it in immediately. Is there a big asset sale coming in the near future that might move you into a higher tax bracket? Would the unrealized loss help reduce your tax bill if you wait to cash it in against that higher tax rate?

When buying and selling securities, for example, you have to be careful to avoid a “wash sale,” where you buy substantially the same asset within 30 days before or after you sell the loss-making asset. The IRS prohibits claiming the loss against income if the taxpayer buys a substantially identical security within 30 days before or after the sale.

The question of timing is important. If you own assets whose resale value has dropped below what you originally paid, even temporarily, you have an untapped loss on the books. How can you take advantage of that?

It does you no good for this “paper loss” to just sit on the books.  You must sell your position to get the benefit.  How you best apply that deductible loss depends upon the type of taxable amount you are setting it against.

Only up to $3,000 of losses each year can be taken as a deduction to reduce ordinary income. But, capital losses can be used 100% against capital gains when you sell an asset; and, any unused amount can be carried forward indefinitely to be used in future years. Here are examples for each circumstance.

Let’s say you have a tax loss on the sale of an asset of $30,000 and taxable income of $30,000.  Because you can only take a maximum of $3,000 per year in capital losses against ordinary income, it would take 10 years to absorb the $30 000 in taxable income.  On the other hand, let’s assume the same amount of tax loss but now you have $30,000 of taxable capital gain.  You can offset the entire amount of the gain and eliminate any taxes that would have otherwise been due for that tax year!

However, you may yet have another choice to make.  Do you own improved rental properties, such as apartments, single-family rentals or commercial property?  If you do, it may be better to use cost segregation tax benefits to offset the capital gain.  Doing so would give you the $30,000 capital loss to apply against an upcoming taxable gain on property you will soon be selling.

Tax planning done correctly can get complicated, especially if you can manage multiple assets as one portfolio to appropriate better tax benefits. If you ever have a question about how all the working parts in a property or business portfolio fit together, and how they can mesh to drive tax benefits your way, call us. The answers you get may very well lead to greater tax savings for you.