Loss carry-forward

What is a loss carry-forward?

A loss carry-forward is a tax term that allows losses from one year to be carried forward to future tax years. For investors and property owners in particular, loss carry-forwards can play an important role in optimising their tax burden.

How does a loss carry-forward work?

If an investor incurs losses in a tax year – whether from property investments or other business activities – a loss carry-forward can be used to offset these losses against future profits in subsequent years. This means that if the investor makes profits in subsequent years, the losses from previous years can be set off against them, resulting in a lower tax burden.

Legal basis for loss carry-forwards

In Germany, loss carry-forwards are governed by Section 10d of the Income Tax Act (EStG). This provision allows taxpayers to carry forward losses arising from employment, from letting and leasing, and from self-employment to future tax assessment periods.

Example of a loss carry-forward

• Year 1: Loss of 10,000 euros from property investments.
• Year 2: Profit of 15,000 euros from the same properties.
• Loss carry-forward: The loss of 10,000 euros is offset against the profit of 15,000 euros in Year 2, meaning that only 5,000 euros are subject to tax.

Advantages of a loss carry-forward

Carrying forward a loss offers numerous advantages for investors:

• Reduction in tax liability: Losses can be claimed for tax purposes and offset against future profits.
• Financial planning: Knowing about future loss carry-forwards enables better planning and investment decisions.
• Flexibility: Losses can be utilised over several years, enabling maximum tax optimisation.

What do I need to bear in mind?

To be able to utilise a loss carry-forward, certain conditions must be met:

• The losses must be recognised in the tax assessment notice.
• Losses are not automatically carried forward; they must be claimed as part of your tax return.
• Losses from certain types of income cannot be offset against other types of income.

A clear example of the topic: loss carry-forward

Imagine that Michael is an investor who buys a flat that he intends to let out. In the first year, he makes a loss of 12,000 euros due to renovation costs and lower rental income. Instead of accepting this loss, Michael decides to carry it forward for the coming years. In the second year, the rental income rises significantly, and he makes a profit of 20,000 euros. Thanks to the loss carry-forward, Michael can now offset the loss of 12,000 euros against the profit of 20,000 euros. As a result, he only has to pay tax on the remaining 8,000 euros. This tax benefit enables Michael to have more capital available for further investments.

Conclusion

Loss carry-forwards are a valuable tool for investors and property investors to optimise their tax burden. The ability to carry losses forward to future years can significantly reduce the tax liability on future profits. Strategic planning that takes loss carry-forwards into account can therefore lead to significant financial relief.