If you're involved in a business, rental activity, partnership, or other investment activity, the IRS uses "at-risk" rules to determine how much of your investment is actually at risk of loss. In general, you're considered at risk for money and property you've contributed, along with certain amounts you've borrowed to fund the activity.
Your at-risk amount helps determine how much of a loss you may be able to deduct on your tax return.
What Is Included in Your At-Risk Investment?
- Cash you contribute to the activity.
- The adjusted basis of property you contribute. If you contribute property, your at-risk amount includes the property's adjusted basis. Adjusted basis is generally what you paid for the property, adjusted for certain tax-related increases or decreases over time.
- Certain borrowed amounts used in the activity when specific requirements are met. You may also be at risk for money you borrow and use in the activity if you are personally liable to repay the loan, or you pledge property, other than property used in the activity itself, as collateral for the loan.
Why the At-Risk Rules Matter
Your at-risk amount limits the losses you can deduct. If your deductible losses exceed the amount you have at risk, the excess loss is generally suspended and carried forward until you increase your at-risk investment or otherwise become eligible to claim the loss.
Understanding your at-risk amount can help ensure your investment losses are reported correctly and that you claim only the deductions allowed under IRS rules.
Additional Information
Publication 925 - Passive Activity and At-Risk Rules