At-Risk Rules: The Loss Limit Before Passive Losses
The second gate a business loss must pass — after basis and before the passive rules — what counts as money at risk, and why nonrecourse debt and guarantees usually do not.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The at-risk rules limit the losses you can deduct from a business or investment to the amount you could actually lose: cash and property you put in, plus debt you are liable for. Losses funded by nonrecourse loans, loans from someone with an interest in the activity, or loss-protection arrangements are suspended until more is at risk.
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Where do the rules fit?
| Order | Limit | What it asks |
|---|---|---|
| 1 | Basis | Do you have enough basis in your interest to absorb the loss? |
| 2 | At-risk (Section 465) | Of that basis, how much is money you could really lose? |
| 3 | Passive activity (Section 469) | Do you materially participate, or is there passive income to offset? |
| 4 | Excess business loss (Section 461(l)) | Is the total business loss above the annual cap? |
A loss must pass each gate in order; what is suspended at one gate carries forward at that gate.
What is at risk?
- Cash contributed
- The adjusted basis of property contributed
- Amounts borrowed for the activity for which you are personally liable, or that are secured by property you own outside the activity
- Qualified nonrecourse financing in the activity of holding real property: nonconvertible debt secured by real property used in the activity, borrowed from a qualified person (a commercial lender that is not the seller or promoter; a related lender only on commercially reasonable terms) or loaned or guaranteed by a government, with no one personally liable
What is not at risk?
- Nonrecourse debt, other than qualified nonrecourse financing on real estate
- Loans from a person who has an interest in the activity (other than as a creditor) or who is related to such a person
- Amounts protected by guarantees, stop-loss agreements, insurance against loss, or similar arrangements
- Nonrecourse seller financing, or nonrecourse loans from a promoter or anyone paid a fee for your investment (these lenders cannot be qualified persons)
A partner's share of partnership recourse debt counts only to the extent the partner bears the economic risk; a personal guarantee of entity debt generally counts only where you would be the payor of last resort, with no realistic right to be repaid by the entity or co-owners — courts decide this case by case.
When does recapture apply?
If your at-risk amount falls below zero at year-end — because you took distributions, recourse debt was converted to nonrecourse, or a stop-loss or similar agreement began — you add the negative amount to income, limited to losses previously deducted (less earlier recapture). The recaptured amount is treated as a deduction for the activity in the next year, still subject to the at-risk limit.
Who runs into these rules?
Real estate investors with seller financing or related-party loans, owners of leveraged equipment, partners in deals financed by other partners, and S corporation shareholders who guarantee corporate debt — for whom the guarantee creates neither basis nor at-risk until they actually pay.
Frequently asked questions
Does a bank loan to my S corporation give me at-risk amount?
No. Your at-risk amount comes from your stock investment, your own loans to the corporation, and amounts you actually pay on a guarantee.
Is each business tested separately?
Each activity is generally separate, though trade or business activities are treated as one if you actively participate in managing them (or, for a partnership or S corporation, if 65 percent or more of the losses go to owners who actively participate).
How do I report it?
On Form 6198, attached to the return for each activity with a loss and amounts not at risk.
Do the rules apply to C corporations?
Only to closely held C corporations (more than 50 percent in value owned by five or fewer individuals at any time in the last half of the year), with exceptions for active equipment leasing and for qualifying active businesses.
Official sources
The IRS explains: “However, you’re considered at risk for qualified nonrecourse financing secured by real property used in an activity of holding real property.” — Internal Revenue Service, Publication 925 (2025), Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925
The IRS explains: “Use Form 6198 to figure: The profit (loss) from an at-risk activity for the current year. The amount at risk for the current year. The deductible loss for the current year.” — Internal Revenue Service, About Form 6198, At-Risk Limitations, https://www.irs.gov/forms-pubs/about-form-6198
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk runs each loss through the four gates in order and tracks the suspended amounts at each one. See pricing or book a free fit call.
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