Losses Can Offset Investment Income

Another nice feature of the final net investment tax regulations released last week is that certain losses are now allowed to offset other net investment income.  In the original proposed regulations, you could not have a loss (such as the sale of stock) reduce your other net investment income.  Once you reached zero, you were stuck at that number.

The final regulations now allow at least three new ways of using losses:

1. If you have a net capital loss for the year, the regular tax laws limit this loss to $3,000.  The final regulations allow this up to $3,000 loss to offset other investment income.
2. If you have a passive loss such as Section 1231 losses, as long as that loss is allowed for regular income tax purposes, you will be allowed to offset that against other investment income.
3. Finally, if you have a net operating loss carry forward that contains some amount of net investment losses, you will be allowed to use that portion of the NOL to offset other investment income.

The final regulations are much more favorable to taxpayers than the original proposed regulations in these areas.  The computations on these allowed losses can be very complex so I would suggest having a qualified tax advisor help you with this.

On a personal note, my scheming wife somehow talked me into staying in Cabo a few more days.  I must admit I did not put up to much of a fight.

Paul Neiffer, CPA