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Using Form 982, reduction of tax attributes, you will likely find that you can release and use the $25K suspend losses on the pre-bankruptcy 1040.
However, any amount not used up by that return will be reduced on Form 982 and will not be available after that tax period. In other words...it won't carry to the post-bankruptcy period. It will be used up by the bankruptcy reduction.
Form 982 applies to discharge of debt which would be used in the estates 1041 tax return when discharge amounts have been determined. Petition was filed 8/25/11. We are now filing our joint 1040 for 2011 and separate form 1041 forms for the estates that also have calendar end. Case is still pending confirmation. Per pub 908 & bulletin 2006-83 allocations have to be made between the returns based on petition date (short year election not used). Question remains do I have to allocate the $25000 passive loss now allowed on the prepetiton 1040 (due to lower income from allocation) with the post petition 1041 for calendar year 2011? The rents and rental expenses have been allocated. Is the fact that there are now separate taxable enities enough to justify each getting their own deductions?( the estate returns one for husband and one for wife have to use married filing separately per code)
I still don't think that the loss can be used by the estate. But I will opt out and let another expert take a look.