7792 / Does the “at risk” limitation on losses apply to an investor in real estate? If so, what effect will it have?
Generally, the “at risk” rules apply to losses incurred after 1986 with respect to real estate placed in service after 1986.1 However, in the case of an interest in an S corporation, a partnership, or other pass-through entity acquired after 1986, the “at risk” rules will apply to losses incurred after 1986 no matter when the real estate was placed in service.2
In general, the “at risk” rules limit the deduction an investor may claim for the investor’s share of net losses generated by the real estate activity to the amount he or she has at risk in that activity. The rules do not prohibit an investor from offsetting the investor’s share of the deductions generated by the activity against the income received from the activity. For a detailed explanation of the operation of the “at risk” limitation, see Q 8006 to Q 8009.
Put as simply as possible, an investor is initially “at risk” to the extent that he or she is not protected against the loss of money or other property contributed to the program. One special exception applies in the real estate context, however. An investor is considered at risk with respect to certain qualified nonrecourse financing incurred in the holding of real property. For the specifics as to how an investor’s “amount at risk” is calculated, see Q 8005.