Which tax carryovers at death survive? (2026 CPA guide)
Death triggers one of the most generous provisions in the tax code — the basis step-up under IRC § 1014 — but it quietly erases some of the most valuable deductions on a client’s return. Capital losses carried forward from a bad market year, net operating losses from a struggling business, charitable contributions that have not yet absorbed the AGI limit, and suspended passive activity losses are all personal attributes. They do not inherit. Planning around tax carryovers at death is really income-tax planning: the final Form 1040 is the last door through which these deductions can walk, and the door closes on December 31 of the year of death. This post walks through the four categories we see most often in Los Angeles practice, with the IRC provisions, Treasury regulations, and IRS publications that actually control the result.
Why do tax carryovers at death disappear instead of passing to the estate? ⚖️
Because the Code and the regulations attach each of these losses to the person who sustained them, not to the property or to the estate. Death severs the attribute from the stream of future income.
The underlying principle is simple: Form 1040 attributes belong to the Form 1040 filer. Revenue Ruling 74-175 is the classic articulation for capital losses — they are only deductible by the individual who sustained them. The same reasoning carries over to net operating losses and to the character limits in IRC § 461(l). The exceptions are narrow and specific. IRC § 469(g)(2) contains the one for passive activity losses. Treas. Reg. § 1.170A-10(d)(4) controls charitable contributions. There is no general rule that lets an estate pick up the decedent’s unused carryovers.
The result is counterintuitive for families that focus on the federal estate tax exemption. A decedent’s estate can be well under the exemption and still lose hundreds of thousands of dollars of deductions at death. Those deductions are on the final 1040, not on Form 706. The IRS summary of the issues the executor has to work through is in IRS Publication 559, which is also a useful starting point for the surviving spouse.
What happens to capital loss carryovers at death? 📉
Unused capital losses are deductible only on the decedent’s final return. Any portion not absorbed there under IRC § 1212(b) is permanently lost.
Individual taxpayers can carry forward excess capital losses to future years under IRC § 1212(b). Under Revenue Ruling 74-175, the carryover belongs to the individual who sustained the loss. On the final return the decedent is still treated as an individual filer for this purpose, so the full carryover is available. If a surviving spouse files a joint final return for the year of death, the joint return absorbs losses from both spouses up to the net gain and up to the $3,000 against ordinary income — and anything left over at that point is gone.
For older clients and clients in declining health, the planning question is whether there is enough capital gain in the final year to use up the carryover. If the carryover is large and the market happens to be flat, the surviving spouse can sometimes realize gains that otherwise would have waited, pairing them with the decedent’s losses on the joint return. Repurchasing the same positions after the sale resets the surviving spouse’s basis — “up-costing” — which trades a lost carryover for a higher future basis on the survivor’s own holdings. The wash-sale rules do not apply because gains are being recognized, not losses.
From our practice: the final return is the deadline
In our Los Angeles office we have seen six-figure capital loss carryovers vanish because no one looked at the Schedule D history before the end of the year of death. Request a transcript, list the carryovers by year of origin, and model the final joint return before the surviving spouse makes year-end investment decisions. It is one of the few areas where good records are worth real money.
How are charitable contribution carryovers at death handled? ❤️
A deceased spouse’s unused five-year carryover is deductible only through the final return. Under Treas. Reg. § 1.170A-10(d)(4), amounts allocable to the decedent are not treated as paid in later years, so the surviving spouse cannot continue using them.
IRC § 170(d)(1) lets individuals carry forward excess charitable contributions for five years. On its face that sounds survivable. But Treas. Reg. § 1.170A-10(d)(4) says the clock stops at death: contributions allocable to a decedent spouse are not treated as paid in each of the five succeeding years after their death. If the carryover is big enough to span years, the piece that would have been used in year three or year four simply never gets claimed.
The planning levers are two. First, for older taxpayers who want to make a large gift, giving sooner and claiming the deduction over a shorter window is safer than giving late and relying on the full five years. Second, where spouses have unequal life expectancies, the healthier spouse is usually the better donor: there is more time to work through the carryover. Transferring assets between spouses before the gift can equalize the position, but moving assets through one spouse immediately before a gift from the other invites step-transaction and dominion-and-control challenges. The timing has to look real.
New 0.5% AGI floor applies even in the year of death
Individual charitable deductions are subject to a 0.5% AGI floor on top of the long-standing percentage limits in IRC § 170(b)(1). The floor applies to the decedent’s final return as well. Model the floor before assuming a late-year gift will create a usable deduction.
Can a net operating loss carry over to the surviving spouse or the estate? 🧾
No. NOLs are personal to the individual who sustained them. The decedent can use the NOL on the final return subject to the 80% of taxable income limit for post-TCJA losses, but any unused balance is lost at death.
The modern NOL regime, in place since the Tax Cuts and Jobs Act, is unforgiving at death. Post-2017 NOLs carry forward indefinitely for the taxpayer who incurred them, but the deduction is capped at 80% of taxable income computed before the NOL. Before an individual NOL is even measured, three sets of limits apply to the underlying loss: outside basis under IRC § 704(d) for partnerships and IRC § 1366(d) for S corporations, the at-risk rules under IRC § 465, and the passive activity rules under IRC § 469. Only after those limits produce a loss can the excess business loss rules in IRC § 461(l) kick in — for 2026, non-corporate losses above $256,000 (single) or $512,000 (married filing jointly) convert to an NOL carryforward.
None of these losses pass to the estate at death. The decedent gets one more swing on the final 1040. An older taxpayer with a sizable NOL and a sympathetic basis story should coordinate with the surviving spouse on whether it is worth accelerating ordinary income — a partial Roth conversion, a retirement plan distribution, a sale of a non-stepped-up asset — into the final joint return to absorb the NOL. IRS Publication 536 covers the mechanics of NOL carryovers for individuals.
What happens to suspended passive activity losses at death? 🏠
Under IRC § 469(g)(2), suspended PALs are allowed on the decedent’s final return only to the extent the loss exceeds the basis step-up under IRC § 1014. The step-up uses up the suspended loss dollar-for-dollar.
Passive activity losses are generally trapped by IRC § 469(g)(2) — allowed only against passive income and released on a fully taxable disposition. Death is treated similarly to a disposition, with a crucial twist. The suspended loss on an interest the decedent held is allowed on the final return, but only to the extent that it exceeds the basis increase the heir receives under IRC § 1014. The policy argument is coherent: the heir gets the economic benefit of the loss through a higher basis, so the decedent should not also deduct the same amount. In practice this means the deductibility of the suspended loss turns on how much step-up the asset actually gets.
| Fact pattern | What the final return shows | Why |
|---|---|---|
| Rental with $100,000 of suspended PALs; FMV at death $600,000; adjusted basis $300,000. | No PAL deduction on the final return. | Basis step-up of $300,000 under IRC § 1014 exceeds the suspended $100,000 — the step-up fully absorbs the loss. |
| Rental with $100,000 of suspended PALs; FMV at death $400,000; adjusted basis $380,000. | $80,000 PAL allowed on the final return. | Basis step-up is only $20,000, so under IRC § 469(g)(2) the loss above the step-up ($80,000) is deductible. |
| Family LP interest with $150,000 of suspended PALs; interest valued with lack-of-marketability and lack-of-control discounts, giving a step-up of only $40,000. | $110,000 PAL allowed on the final return. | Discounts shrink the step-up, which is helpful here — more of the suspended loss is released. |
IRS Publication 925 gives the IRS’s own walk-through of the passive activity rules and includes the death exception. The common mistake is coordination: the final 1040 is prepared by one practitioner, the Form 706 estate return (if any) is prepared by another, and no one checks whether the step-up for Form 706 purposes was the same number used to size the PAL deduction. The two returns have to tell the same story.
How should a surviving spouse plan the final joint return? 🧮
Model the final 1040 well before year-end, inventory every carryover, and decide whether to accelerate income so that attributes which die with the taxpayer are actually used.
- Pull a transcript and list every carryover. Capital losses, NOLs, charitable carryovers, AMT credit, foreign tax credit, and PAL schedules each have their own form and their own expiration rule.
- Price the step-up. Order date-of-death appraisals for real estate, closely held interests, and anything with a low basis. The appraised number drives both the Form 706 estate valuation and the IRC § 469(g)(2) ceiling on suspended PALs.
- Model the final joint 1040. Add realistic year-end income events and run the carryovers against them. The question is not “what do we owe?” but “which attribute dies if we file as-is?”
- Coordinate acceleration events. Roth conversions, deferred compensation payouts, and elective asset sales can create the taxable income needed to absorb a dying NOL or charitable carryover.
- Document before the return goes out. The IRS cross-references the executor’s filings with the surviving spouse’s, so Form 1310, Form 56, and any Form 706 should move in sync with the 1040.
From our practice: the executor and the surviving spouse often need separate advice
In our practice the final joint return is where competing interests show up for the first time. The surviving spouse wants the lowest 1040 tax; the executor is thinking about the estate’s basis and the beneficiaries’ later tax. We ask early whether both roles are the same person. When they are not, the carryover decisions should be documented with the beneficiaries, not just left to the signing spouse.
Summary: tax carryovers at death
- Capital losses are deductible only on the final return under IRC § 1212(b) and Rev. Rul. 74-175; nothing passes to the estate.
- Charitable contribution carryovers end at death — Treas. Reg. § 1.170A-10(d)(4) stops the five-year clock in IRC § 170(d)(1).
- NOLs die with the taxpayer; the final 1040 is the last chance to use them, subject to the 80% limit.
- Suspended passive activity losses are released on the final return only to the extent they exceed the IRC § 1014 basis step-up.
- Build a carryover inventory and model the final joint return before year-end. The deductions walk out the door with the taxpayer otherwise.
Frequently asked questions about tax carryovers at death ❓
Q. Do unused capital loss carryovers at death pass to the surviving spouse?
No. Under Revenue Ruling 74-175, excess capital losses are only deductible by the individual who sustained them. Under IRC § 1212(b) they can be claimed on the decedent’s final return — including the final joint return if the surviving spouse files jointly for the year of death — but any amount unused on that return is permanently lost. The estate does not inherit them.
Q. Can my spouse use my charitable contribution carryover after I die?
Only through the year of death. IRC § 170(d)(1) gives individuals a five-year carryforward for excess charitable contributions, but Treas. Reg. § 1.170A-10(d)(4) stops the clock at death: unused amounts allocable to the decedent are not treated as paid in later years. The final joint return is the last chance to absorb them.
Q. Does an NOL carry over to the estate when a taxpayer dies?
No. Net operating losses are personal to the individual who incurred them. The decedent’s post-TCJA NOL can be used on the final return (subject to the 80% of taxable income limit), but any remaining balance disappears at death — it is not inherited by the estate or the surviving spouse.
Q. What happens to suspended passive activity losses when a partner dies?
IRC § 469(g)(2) allows the suspended PAL to be deducted on the decedent’s final return, but only to the extent the loss exceeds the step-up in basis under IRC § 1014. In other words, every dollar of basis step-up uses up a dollar of the suspended loss. If the step-up fully absorbs the suspended loss, nothing is deductible on the final return and nothing carries to the heir.
Q. Does the surviving spouse get a step-up in basis on inherited assets?
Generally yes. Property acquired from a decedent takes a basis equal to fair market value at the date of death under IRC § 1014. In community property states such as California, the surviving spouse’s half may also receive a step-up (so-called “double step-up”) when the property is community property. Valuation discounts on closely held interests can reduce how much step-up is actually realized.
Q. Why does estate planning for tax carryovers at death matter if the estate is below the federal exemption?
Because this is an income-tax question, not an estate-tax one. Even families well under the federal estate tax exemption can lose six figures of unused capital losses, NOLs, charitable carryovers, or passive activity losses at death. These attributes expire on the final 1040, not on Form 706.
This article is general information, not tax or legal advice for your situation. Carryover planning turns on facts that change every year. If you are a surviving spouse, an executor, or an advisor facing a final return, contact SW Accounting & Consulting Corp for a confidential review.
