J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.17 At-Risk Limits

The at-risk rules prevent investors from claiming losses in excess of their actual tax investment by barring them from including nonrecourse liabilities as part of the tax basis for their interest. Almost all ventures are subject to the at-risk limits. Real estate placed in service after 1986 is subject to the at-risk rules as well, but most real estate nonrecourse financing can qualify for an exception (10.18).

EXAMPLE

Crystal Parker invests cash of $1,000 in a venture and signs a nonrecourse note for $8,000. In 2010, her share of the venture’s loss is $1,200. The at-risk rules limit her deduction to $1,000, the amount of her cash investment; as she is not personally liable on the note, the amount of the liability is not included as part of her basis for loss purposes.

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Caution

At-Risk Rules Limit Loss Deductions

The purpose of at-risk rules is to keep you from deducting losses from investments in which you have little cash invested and no personal liability for debts.

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Losses disallowed under the at-risk rules are carried over to the following year (10.21).

Form 6198.

If you have amounts that are not at risk, you must file Form 6198 to figure your deductible loss. A separate form must be filed for each activity. However, if you have an interest in a partnership or S corporation that has more than one investment ...