8003 / What are the “at risk” rules with respect to losses?

The “at risk” rules are a group of provisions in the IRC and regulations that limit the current deductibility of “losses” generated by certain tax shelters (and certain other activities) to the amount that the taxpayer actually has “at risk” (i.e., in the economic sense) in the tax shelter. The primary targets of the “at risk” rules are the limited partner and the nonrecourse financing of a limited partner’s investment in the shelter (which was once common in all tax shelters); however, the rule also applies to certain corporations and general partners in both limited and general partnerships and to non-leverage risk-limiting devices (e.g., guaranteed repurchase agreements) designed to generate tax deductions in excess of the amount for which the investor actually bears a risk of loss in a shelter.¹

Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. If losses from an at-risk activity are allowed, they are subject to recapture in later years if the amount at risk is reduced below zero. For these purposes, a loss is the excess of allowable deductions from the activity for the year (including depreciation or amortization allowed or allowable and disregarding the at-risk limits) over income received or accrued from the activity during the year. Income does not include income from the recapture of previous losses.²

Other at risk provisions of the IRC limit the availability of the investment tax credit with respect to property acquired for purposes of the tax shelters or other activities described in Q 8004.³

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1.  Sen. Rep. 94-938, 1976-3 CB (vol. 3) 57, at 83.

2.  IRS Publication 925 (2019).