MODULE 34 TAXES: TRANSACTIONS IN PROPERTY 501

(1) A net capital loss is a deduction in arriving at AGI, but limited to the lesser of
(a) $3,000 ($1,500 if married filing separately), or
(b) The excess of capital losses over capital gains
(2) Both a NSTCL and a NLTCL are used dollar-for-dollar in computing the capital loss deduc-
tion.
EXAMPLE: An individual had $2,000 of NLTCL and $500 of NSTCLfor 2008. The capital losses are
combined and the entire net capital loss of $2,500 is deductible in computing the individual's AGl.

(3) . Short-term losses are used before long-term losses. The amount of net capital loss that ex-
ceeds the allowable deduction may be carried over for an unlimited period of time. Capital
loss carryovers retain their identity; short-term losses carry over as short-term losses, and
long-term losses carry over as long-term losses in the 28% group. Losses remaining unused
on a decedent's final return are extinguished and provide no tax benefit.
EXAMPLE: An individual has a $4,000 STCL and a $5,000 LTCLfor 2008. The $9,000 net capital loss
results in a capital loss deduction of $3,000 for 2008, while the remainder is a carryover to 2009. Since
$3,000 of the STCL would be used to create the capital loss deduction, there is a $1,000 STCL carryover and
a $5,000 LTCL carryover to 2009. The $5,000 LTCL carryover would first offset gains in the 28% group.

(4) For purposes of determining the amount of excess net capital loss that can be carried over to
future years, the taxpayer's net capital loss for the year is reduced by the lesser of (1) $3,000
($1,500 if married filing separately), or (2) adjusted taxable income.

(a) Adjusted taxable income is taxable income increased by $3,000 ($1,500 if married filing
separately) and the amount allowed for personal exemptions.

(b) An excess of deductions allowed over gross income is taken into account as negative
taxable income.
EXAMPLE: For 2008, a single individual with no dependents had a net capital loss of $8,000, and had
allow.able deductions that exceeded gross income by $4,000. For 2008, the individual is entitled to a net
capital loss deduction of $3,000, and will carry over a net capital loss of $5,500 to 2009. This amount
represents the 2008 net capital loss of $8,000 reduced by the lesser of (1) $3,000, or (2) - $4,000 +
$3,000 + $3,500 personal exemption = $2,500.

5. Corporations have special capital gain and loss rules.

a: Capital losses are only allowed to offset capital gains not ordinary income.
b. A net capital loss is carried back three years, and forward five years to offset capital gains in
those years. All capital loss carrybacks and carryovers are treated as short-term capital losses.
EXAMPLE: A corporation has a NLTCL of $8,000 and a NSTCG of $2,000, resulting in a net capital loss of
. $6,000 for 2008. The $6,000 NLTCL is not deductible for 2008, but isfirst carried back as a STCL to 2005 to
offset capital gains. lfnot used up in 2005, the STCL is carried to 2006 and 2007, and then forward to
2009,2010,
2011, 2012, and 2013 to offset capital gains in those years. .
c. Although an alternative tax computation still exists for a corporation with a net capital gain, the' al-

ternative tax computation applies the highest corporate rate (35%) to a net capital gain and thus
provides no benefit.

C. Personal Casualty and Theft Gains and Losses

Gains and losses from casualties and thefts of property held for personal use are separately netted,
without regard to the holding period of the converted property.

1. If gains exceed losses (after the $100 floor for each loss), then all gains and losses are treated as
capi-
tal gains and losses, short-term or long-tern depending upon holding period.
EXAMPLE: An individual incurred a $25,000 personal casualty gain, and a $15,000 personal casualty loss (after the
$100 floor) during the current taxable year. Since there was Cl net gain, the individual will report the gain and loss as a
$25,000 capital gain and a $15,000 capital loss.
2. If losses (after the $100 floor for each loss) exceed gains, the losses (1) offset gains, and (2) are an
or-
dinary deduction from AGI to the extent in excess of 10% of AGI.
EXAMPLE: An individual had AGl of $40,000 (before casualty gains or losses), and also had a personal casualty loss
of $25,000 (after the $100 floor) and a personal casualty gain 'of $15,000. Since there was a net personal casualty loss,
the net loss will be deductible as an itemized deduction of [$25,000 - $15,000 - (10% x $40,000)J = $6,000.