As I stated, I don’t know anything about US laws but I did find this from the South Bend Tribune which states it a lot like Canada’s. The inheritance is tax free but tax losses don’t follow to the heir.

“Q. My uncle died in 2017, and I was surprised to learn I was the sole heir of his modest estate, even though I didn’t know him that well. In 2018, I inherited some stocks and mutual funds that he owned, and I understand they are tax-free. Is that right? In going over his old tax returns, I noticed that when he died, he had an unused capital loss carryover of more than $10,000 from some stocks he had sold in 2016. Since I’m the only heir to his estate, can I use the capital loss on my own tax return to offset some of my gains?”

— T.B., Niles

“A. Go to the head of the class, T.B. You’re absolutely right in saying receiving the inherited stocks and mutual funds is a tax-free event. As far as your uncle’s stock loss is concerned, some people think the rules for capital losses may have been part of Dante’s Circles of Hell.

Schedule D, used for capital gains and losses, can be pretty close to cruel and unusual punishment, much like trying to explain baseball’s “infield fly rule.” It’s bad enough that only $3,000 of net capital losses can be deducted in any year after offsetting any capital gains. After all, there’s no limit to how much net capital gains can be taxed in any particular year. But not only that, in your case, capital losses can’t be passed on to heirs, other than a surviving spouse.

Basically, your uncle’s loss is lost.”

I also found this from H&R Block. It shows it as a capital loss on inherited property rather than inherited capital losses. Two very different things. It goes on to describe the basis (or ACB to us) as the FMV on the day of passing. It says you can use any capital loss incurred from that date but makes no mention of any capital loss incurred by the deceased being used by the inheritor. That was probably used on the estate’s final tax filing.

“Question

I have a question about capital gains on inherited property. My two siblings and I inherited my mother’s house, which remained vacant until we sold it at a loss (based on the appraised value). Are we able to claim a capital loss on inherited property?”

“Answer

Regarding capital gains on inherited property (and losses), you can claim a capital loss on inherited property if you sold it and all of these are true:

• You sold the house in an arm’s length transaction.
• You sold the house to an unrelated person.
• You and your siblings didn’t use the property for personal purposes.
• You and your siblings didn’t intend to convert the property to personal use before the sale.

An arm’s length transaction is a transaction where the buyers and sellers have no relationship to each other. Except when handling an inheritance, related parties include:

• The estate
• The executor
• Beneficiaries of the estate

Report the sale on Form 8949, which will transfer to Schedule D. Enter your basis in the property as your share of the fair market value (FMV) of the property on your mother’s date of death. Ex: The FMV was $150,000. You split it equally three ways. So, your share of the basis is $50,000.

For the date acquired, enter “Inherited.” This makes sure you receive long-term capital gain or loss treatment. Then, enter the date sold and the amount realized. The amount realized is the sales price minus any seller-paid settlement costs. You’ll only report your share — 1/3 of the amount realized. If your share of the amount realized is less than your basis, you’ll have a capital loss on inherited property.”

In the paragraph above, it describes a capital gain or loss from the FMV on the day of passing until sale but not on the deceased person’s gain or loss.

I believe (correct me if wrong) that the K-1 Form is used for reporting on Partnerships as to each party’s proportion of earnings, costs, etc. It doesn’t appear to refer to heirs other than maybe a spouse or common-law partner, etc. as it includes Domestic Partners. From what I know, I believe the spouse, etc. does inherit the capital losses but not other heirs. Parties in a Partnership would retain their proportion of any capital losses at the time of one partner’s passing but I don’t believe they can inherit any of the deceased partner’s losses. I think those can only go to a Domestic Partner.