Senior Living: Understanding capital losses

Each year many investors ponder repositioning their portfolio, and for those that hold stock outside of registered accounts, the decisions to do so could have beds for handicapped immediate tax implications. If you sell securities that have accrued gains to modify your strategic asset allocation, you’ve essentially increased your taxable income.

If on the other hand, you sell a security at an accrued loss, you can then apply the capital loss against any gains for taxes. No one wants losses; however, they are indeed beneficial when used to reduce capital gains in other tax years. Tax loss selling strategies are something that your adviser may want to do with your portfolio.

It is a good idea to speak to a specific income tax professional regarding your own personal situation, but today we will provide some general tips on how this is typically done.

If your stock portfolio has declined in value to the point that the market price is now below your original cost, you now have an accrued loss for tax purposes. Of course, this is just a paper loss until you sell and then the loss is actually realized.

A capital loss is not a basic income tax deduction. A capital loss is used only against capital gains and applied initially against any capital gain realized in the same tax year. Excess capital losses can be accumulated and carried back to any of the three prior years or carried forward to any future years where there are capital gains.

Carrying a capital loss back reduces the income taxes that were payable in the prior year(s), and can therefore result in a refund of taxes that you may already have paid. The inclusion rate of capital gains or losses is still 50 per cent and your adviser will need to know the following:

1) What is the amount of the proceeds or disposition?

2) What is the ACB or adjusted cost base?

3) What, if any, are the expenses that were incurred when the asset was sold?

If you have a capital gain, you can either defer part of the gain by claiming a reserve, or you can claim a lifetime capital gains deduction.

Claiming a reserve means you will not receive the full payment of capital at the time you sell your property; instead, you will set up a plan to receive the capital typically over a four-year time period. A lifetime capital gains deduction applies to those people who sell a qualified small business corporation or a qualified farm or fishing property. For the 2021 tax year, this deduction will be $892,218 for qualified small business corporation shares or $1 million to qualified farm or fishing properties.

Many investors, (and some advisers), hold on to losing positions far too long in the hopes of regaining their losses, however, there could be a silver lining in those portfolio declines. Tax loss selling strategies have been around for decades and many experienced advisers encourage clients to consider the possibilities of engaging in this approach to reduce the overall tax liability or to also receive a refund of previously paid taxes.

It could make a lot of sense to sell underperforming stocks from an investment perspective and one that you may want to consider instead of holding on to http://query.nytimes.com/search/sitesearch/?action=click&conten... losing securities waiting for a market correction that may never come. Talk to your adviser, and if you are not satisfied, get a second opinion. Remember, it’s your money.

One piece of advice that has always kept me forward thinking in life and investing: “failure is a part of everyone’s life and even if it’s difficult, we all must move ahead, making sure we never run back to what broke you.”