Definition
The at-risk rules limit deductible losses to the amount a taxpayer actually has economically at stake in an activity.
How It Works
A taxpayer can deduct losses only up to their at-risk amount, generally cash invested plus debt they are personally liable for. Losses beyond that are suspended until the at-risk amount increases.
Example
An investor with limited personal exposure in a deal finds their deductible loss capped at the amount they truly have at risk, even if the activity generated a larger paper loss.
Who It Applies To
Investors in real estate, partnerships, and other activities with leverage.
Watch-Outs
The at-risk rules apply alongside the passive activity rules, so a loss must clear both hurdles to be deductible currently. Nonrecourse financing often does not increase the at-risk amount.
