The at-risk rules of Section 465 are a second gate a loss must pass through after basis: a taxpayer can deduct losses from an activity only up to the amount they could actually lose economically. The at-risk amount includes cash contributed, the basis of property contributed, and borrowed money the taxpayer is personally liable to repay or has pledged personal assets against. Nonrecourse loans (where the lender can only take the activity's property) generally do not count, with an important exception for qualified nonrecourse financing on real estate, which is why leveraged rental real estate usually clears this hurdle. Losses disallowed by the at-risk rules are suspended and carry forward until the at-risk amount increases. The rules apply activity by activity and are enforced on Form 6198.
At-Risk Limitation
Primary authority: IRC §465; Form 6198
The authority behind it
IRC §465; Form 6198
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
An investor puts $20,000 cash into a venture and the venture borrows $80,000 on a loan only the lender can collect from the business. Her share of losses is $35,000, but she may deduct only $20,000 this year; $15,000 is suspended until she is at risk for more.
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