Can my Net Operating Loss (NOL) be applied to offset Long-term Capital Gains Tax?

The relationship between NOLs and capital gains depends on when your NOL was generated. For NOLs arising in tax years beginning after December 31, 2020, you can generally carry forward indefinitely, but there's an 80% limitation of taxable income. However, here's the important part for your situation - capital gains are indeed considered part of your taxable income. So yes, your NOL can offset capital gains, but with that 80% limitation. This means you'll pay tax on at least 20% of your net capital gains. The confusion you're running into might be because there are special rules for different types of losses. Capital losses have their own rules and can directly offset capital gains, while NOLs are business losses that can offset various types of income including capital gains. For your property sales, you'll also need to consider depreciation recapture, which is taxed at a maximum 25% rate rather than the lower capital gains rates. This can significantly impact your final tax bill.

After dealing with a similar situation last year, I found this amazing service called taxr.ai (https://taxr.ai) that helped me understand how my business losses affected my investment income. I was getting confused with all the different rules about NOLs, capital gains, and depreciation recapture, especially with the tax law changes in recent years. I uploaded my previous tax returns and answered a few questions about my business losses and potential property sales. The AI analyzed everything and gave me a clear breakdown of how my NOLs would apply to different types of income, including capital gains. It even factored in the depreciation recapture calculations that I was completely overlooking. What I liked most was that it showed me several scenarios based on timing of the sales and how that would affect my overall tax strategy. Definitely worth checking out if you're trying to make decisions before your CPA appointment.

I was initially skeptical about using taxr.ai like I mentioned, but I decided to give it a try since my consultation with my accountant was weeks away. I'm actually really impressed with how it handled my NOL situation. The system guided me through my specific scenario with rental properties and business losses. It clearly showed how my NOLs would offset different income types, including the capital gains from a property sale I was considering. The tool highlighted that I needed to be careful about the timing of my sale because of the 80% limitation. What really surprised me was how it broke down the depreciation recapture portion and showed exactly what would be taxed at the 25% rate versus the lower capital gains rates. The visualization of different scenarios helped me decide to stage my property sales across two tax years instead of selling everything at once.

If you're struggling to get answers from your CPA during tax season, I've been there! I discovered a service called Claimyr (https://claimyr.com) that helped me get through to an actual IRS agent to verify the NOL rules. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c I was confused about similar NOL questions last year when selling a rental property. After trying unsuccessfully for days to reach someone at the IRS, I used Claimyr and got connected to an agent within 20 minutes. The agent confirmed that yes, NOLs can offset capital gains (including from property sales) but with the 80% limitation for newer NOLs. The agent also pointed me to some specific IRS publications that addressed my situation and explained how the depreciation recapture would be handled. It saved me weeks of uncertainty while waiting for my tax professional's availability.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I had NOL questions similar to yours that I've been trying to get answers on for weeks. I was absolutely shocked when I got connected to an IRS representative in about 15 minutes. The agent was actually really helpful and explained that my 2022 NOL can indeed offset capital gains from a property sale, but confirmed the 80% limitation. They also clarified that the limitation applies to my total taxable income for the year, not just to the capital gains portion. The agent even emailed me links to specific IRS publications that addressed my situation. This saved me from potentially making a costly mistake in my tax planning. I was planning to sell two properties this year, but now I'm going to split the sales between this year and next to better utilize my NOL carryforwards.

Something important that hasn't been mentioned yet - if you're planning to use NOLs against capital gains, you should consider the order of operations for tax calculations. The NOL deduction is taken after you calculate your capital gains tax, which can affect your overall strategy. Also, remember that for individuals, the long-term capital gains rates (0%, 15%, or 20%) depend on your taxable income after deductions. By applying your NOL to reduce your overall taxable income, you might drop into a lower capital gains tax bracket for the portion of gains that aren't offset by the NOL. This is why timing can be so critical - strategically applying NOLs might not only offset some gains but could potentially reduce the tax rate on your remaining gains.

Something else to consider - if the properties you're selling have been rentals, make sure you understand how suspended passive losses factor into this equation. When you sell a rental property, previously suspended passive losses become fully deductible. This is separate from NOLs but could significantly impact your tax situation. I made the mistake of not accounting for this when selling a rental last year, and my tax software didn't automatically catch it until my accountant reviewed everything.

This is exactly the kind of complex tax situation where getting multiple perspectives really helps! I've been through something similar with NOLs and property sales, and it's definitely not straightforward. One thing I learned the hard way is that the interaction between NOLs, capital gains, and depreciation recapture can vary significantly based on your specific circumstances. For instance, if you have both federal and state NOLs, the rules might be different at each level. Some states don't conform to federal NOL rules, so you could have a situation where your federal taxes are offset but your state taxes aren't. Also, since you mentioned you're planning to keep 3 other properties, consider whether those will continue generating rental income or losses. If they're going to produce more passive losses in future years, that might influence your decision about timing the sales and utilizing your current NOLs. The 80% limitation on post-2020 NOLs is real, but as others have mentioned, it can still provide substantial tax savings. Given that you're trying to free up cash to pay off mortgages on your other properties, running the numbers on different scenarios (selling all at once vs. spreading over multiple years) could save you thousands in taxes and help you achieve your debt payoff goals more efficiently.

Great discussion everyone! As someone who's navigated similar NOL and capital gains situations, I wanted to add a few practical considerations that might help with your decision-making process. First, don't forget about the Net Investment Income Tax (NIIT) - if your modified adjusted gross income exceeds certain thresholds ($200k single, $250k married filing jointly), you'll pay an additional 3.8% on your investment income including capital gains. Your NOL can help reduce your overall income and potentially keep you below these thresholds. Second, regarding timing strategies, consider the "installment sale" option if you're flexible on receiving the full proceeds immediately. This allows you to spread the capital gains over multiple years, which could be particularly beneficial if you have NOL carryforwards that might otherwise expire unused. Finally, since you mentioned wanting to pay off mortgages on your other properties, remember that mortgage interest is still deductible for investment properties (unlike the limitations on personal residence mortgage interest). Running a cash flow analysis comparing the tax benefits of keeping the mortgages versus the interest savings from paying them off might influence your overall strategy. The interplay between NOLs, capital gains timing, and your broader financial goals definitely warrants that CPA consultation, but at least now you have a solid foundation for that discussion!

This has been such an enlightening discussion! As someone who's dealt with similar NOL complexities, I wanted to share one additional strategy that might be helpful for your situation. Consider doing a "dry run" calculation using tax software or working with a tax professional to model different scenarios before making your final decision. I found that plugging in the actual numbers - your NOL carryforward amounts, estimated capital gains, depreciation recapture, and other income - really clarified which approach would be most beneficial. Also, since you mentioned the properties are investments you're planning to sell, make sure you've held them for more than a year to qualify for long-term capital gains treatment. The difference between ordinary income rates and capital gains rates can be substantial, especially when combined with your NOL strategy. One last thought - if you do decide to stagger the sales across tax years, consider which properties to sell first. If one has significantly more depreciation recapture than the others, you might want to pair that with a year where you have more NOL available to offset the higher-taxed recapture portion. The fact that you're thinking through all these variables before your CPA meeting puts you in a great position to make an informed decision. Good luck with whatever strategy you choose!

I've been following this discussion closely as someone who went through a similar NOL/capital gains situation last year, and I wanted to add one crucial consideration that hasn't been fully addressed - the impact of state taxes on your overall strategy. While everyone's correctly focused on the federal 80% NOL limitation, many states have completely different rules. Some states don't allow NOL carryforwards at all, others have shorter carryforward periods, and some have different limitation percentages. Since you're dealing with significant capital gains, the state tax impact could be substantial and might influence your timing decisions. For example, in my state, NOLs could only offset 80% of income but the limitation was calculated differently than federal, which meant I had to run separate calculations for state and federal to optimize both. I ended up splitting my property sales across two years primarily because of the state tax implications, even though the federal treatment would have been similar either way. Also, regarding the earlier mention of tax software for dry runs - I found that TurboTax Premier and FreeTaxUSA handled the NOL carryforward scenarios fairly well, but for complex situations like yours with multiple properties and depreciation recapture, nothing beats having a tax professional run the projections. The software tends to miss some of the nuanced interactions between NOLs and passive activity losses that others have mentioned. Given your goal of paying off mortgages on your other properties, make sure to factor in the state tax savings (or lack thereof) when calculating your net proceeds from the sales. This could significantly impact whether you'll have enough cash flow to achieve your debt payoff objectives.

This has been an incredibly thorough discussion that's covered most of the key considerations for NOLs and capital gains! As someone who recently worked through a similar situation, I wanted to add one final perspective that might help tie everything together. The consensus here is correct - NOLs generated after 2020 can offset capital gains but with the 80% limitation, and this applies to your overall taxable income including both regular capital gains and depreciation recapture. However, what really made the difference in my case was creating a multi-year tax projection that looked at not just this year, but the next 2-3 years. Since you mentioned wanting to pay off mortgages on three other properties, consider whether those properties might generate additional losses in future years (repairs, maintenance, vacancy periods, etc.). If so, you might end up with more NOLs in the future, which could influence whether to use your current NOLs now or preserve them. Also, given all the complexity around state conformity, NIIT thresholds, depreciation recapture rates, and potential installment sale options, I'd strongly recommend paying for a comprehensive tax projection from your CPA rather than waiting for just a consultation. The upfront cost will likely be far less than the potential tax savings from optimizing your strategy. The fact that you're thinking through all these variables ahead of time puts you in a much better position than most people who just sell and deal with the tax consequences later. Best of luck with your decision!

This has been such a comprehensive discussion covering all the major aspects of NOLs and capital gains! As a tax professional who works with real estate investors regularly, I wanted to add one practical tip that might help streamline your decision-making process. Consider requesting a "tax projection letter" from your CPA that outlines the specific tax consequences of different scenarios in writing. This serves two purposes: first, it gives you concrete numbers to base your decision on, and second, it provides documentation of the tax planning advice in case you're ever questioned about your strategy. Given the complexity everyone has discussed - the 80% NOL limitation, state tax variations, NIIT considerations, depreciation recapture, and multi-year planning - having this analysis documented will be invaluable. Many CPAs will provide this service for a reasonable fee, especially during slower periods outside of tax season. One additional consideration for your mortgage payoff strategy: if you're planning to acquire more investment properties in the future, keeping some liquidity rather than paying off all mortgages might be beneficial. The mortgage interest deduction on investment properties, combined with potential appreciation and cash flow from new acquisitions, could outweigh the psychological benefits of being debt-free. The thorough preparation you're doing now will definitely pay off in optimizing your tax situation and achieving your financial goals!

This discussion has been absolutely incredible - I feel like I just got a masterclass in NOL strategy and real estate tax planning! As someone who's been lurking in this community but never posted before, I had to jump in because I'm facing almost the exact same situation. I have NOL carryforwards from a business that didn't work out, and I'm sitting on two rental properties that have appreciated significantly. Like Ashley, I was getting conflicting information about whether NOLs could offset capital gains, and the 80% limitation was particularly confusing. What really struck me from this discussion is how interconnected everything is - it's not just about the NOL rules, but also state tax conformity, NIIT thresholds, depreciation recapture rates, timing strategies, and even broader investment goals. I never would have thought about things like suspended passive losses or the installment sale option without this conversation. The recommendation about getting a comprehensive tax projection rather than just a consultation really resonates. I was planning to just ask my CPA a few quick questions, but it's clear this needs a much more thorough analysis to get it right. Thanks to everyone who contributed such detailed insights - this community is amazing for complex tax situations like these!

This has been an absolutely phenomenal discussion that covers virtually every angle of NOL and capital gains planning! As someone new to this community but not new to complex tax situations, I wanted to add one perspective that might help others in similar situations. The key takeaway I'm getting from all these expert contributions is that NOL planning isn't just about the immediate tax year - it's about optimizing your entire financial strategy over multiple years. The interplay between federal and state rules, NIIT thresholds, depreciation recapture, and your broader investment goals creates a decision matrix that really requires professional modeling. What's particularly valuable about this discussion is how it demonstrates the importance of asking the right questions. Ashley started with a seemingly straightforward question about NOLs offsetting capital gains, but the conversation revealed layers of complexity that could significantly impact the optimal strategy. For anyone else reading this thread who's in a similar situation, I'd recommend bookmarking this discussion and using it as a checklist when meeting with your tax professional. The collective expertise shared here has created an incredibly comprehensive framework for NOL and capital gains planning that goes far beyond what you'd typically find in a single consultation. Thanks to everyone who contributed such detailed insights - this is exactly the kind of collaborative knowledge-sharing that makes this community invaluable for navigating complex tax situations!

This discussion has been absolutely incredible to follow! As a tax professional who specializes in real estate and business taxation, I wanted to add a few final technical points that might help solidify some of the excellent advice already shared. First, regarding the 80% limitation on post-2020 NOLs - it's important to understand that this applies to your taxable income before the NOL deduction, not after. So if you have $100,000 in capital gains and other income, you can offset up to $80,000 with NOLs, leaving $20,000 subject to tax. Second, for those mentioning state tax considerations, this is absolutely critical. States like California, New York, and New Jersey have their own NOL rules that may not conform to federal changes. Some states also have separate limitations or carryforward periods that could significantly impact your overall tax burden. Third, the interaction with passive activity loss rules is complex but crucial for rental property owners. When you dispose of your entire interest in a passive activity (like selling a rental property), any suspended passive losses become fully deductible against all types of income, not just passive income. This can create additional tax planning opportunities beyond just the NOL considerations. Finally, don't forget about the potential impact of the Additional Medicare Tax (0.9%) on high earners, which applies to wages and self-employment income over certain thresholds. While this doesn't directly affect capital gains, your NOL strategy could impact your overall income level and trigger or avoid this additional tax. The comprehensive approach everyone has advocated for here is exactly right - these interconnected tax provisions require careful modeling to optimize your overall strategy!

As someone who just went through a similar NOL situation last year, I want to emphasize how crucial it is to understand the timing implications that several people have touched on here. The 80% limitation on post-2020 NOLs is real and significant, but what really matters is optimizing across multiple tax years. In my case, I had about $150,000 in NOL carryforwards and was looking at selling two rental properties with substantial gains. After running projections with my CPA, we discovered that selling both properties in the same year would waste some of the NOL benefit due to the 80% cap, while spreading the sales across two years allowed me to maximize the offset in both years. The key insight was that NOLs don't expire quickly anymore (indefinite carryforward for post-2020 losses), so there's flexibility in timing. But you have to balance this against other factors like potential changes in tax rates, your overall financial goals, and as others mentioned, state tax implications. One thing I wish I had considered earlier was the impact on my Adjusted Gross Income for various tax credit phase-outs. By strategically using NOLs to keep my AGI lower, I was able to retain eligibility for certain tax benefits that I would have lost with higher income from the capital gains. The comprehensive approach everyone is advocating here is spot-on - this really requires professional modeling to get the optimization right, especially with all the interconnected variables like depreciation recapture, state taxes, and NIIT thresholds.

This has been an incredibly comprehensive and educational discussion! As someone who's been dealing with NOL carryforwards from a failed business venture, I can't thank everyone enough for breaking down all these complex interactions. What really stands out to me is how this started as a seemingly straightforward question about NOLs offsetting capital gains, but evolved into a masterclass on integrated tax planning. The 80% limitation is definitely real for post-2020 NOLs, but as many have pointed out, the strategic considerations go far beyond just that basic rule. I'm particularly grateful for the insights about state tax conformity issues - I'm in Illinois and had no idea that state NOL rules might differ from federal rules. That alone could significantly impact my planning for a potential property sale next year. The recommendation to get a comprehensive multi-year tax projection rather than just a quick consultation really resonates. Given all the variables discussed here - NIIT thresholds, depreciation recapture rates, suspended passive losses, timing strategies, and broader investment goals - it's clear that optimizing this requires professional modeling. One thing I'm curious about that hasn't been fully addressed - for those of us with NOLs from business failures rather than rental property losses, are there any additional considerations when applying them against real estate capital gains? I assume the same 80% limitation applies regardless of the NOL source, but wanted to confirm that. Thanks again to everyone who contributed such detailed expertise. This community is invaluable for navigating complex tax situations!