IRS Rule: Reporting an inherited capital loss

The equity markets haven’t been kind to individual investors over the last decade. I always beware those sales pitches from investment firms that show equity growth over a specific time, choosing to show gains starting from a market bottom (2009).

If you have been investing into a 401k or any kind of equity account every year for the last decade, chances are that you lost quite a bit of money in both 2008 and 2011. Many people make it worse since they freak out and sell at or near the bottom: The flight to cash.  The S&P 500 has taken over six years to recover to the 2007 level.

S&P 500 Index from 2007 - 2013

Now that the economic recovery is picking up steam and markets are on their way back up, you may find yourself in the position of inheriting a trust or other estate account that still has a capital loss.  You can take over that loss as a capital loss carryover.  To do this, you will need to get an IRS form K-1 from the trust/estate that documents unused Capital Loss Carryover. You then apply that against any capital gain/loss that you’re recording in your 1040 form.