8689 / What are the “at risk” rules with respect to investor losses?
The at risk rules are a group of provisions in the IRC and regulations that limit the current deductibility of “losses” generated by tax shelters (see Q 8687) and certain other activities to the amount that the taxpayer actually has “at risk” (i.e., in the economic sense) in the tax shelter. “Loss” for purposes of the at risk rules means the excess of allowable deductions for the tax year (including depreciation or amortization allowed or allowable and disregarding the at risk limits) over the taxpayer’s income from the activity for the tax year.1Historically, the primary targets of the at risk rules have been limited partners and the nonrecourse financing of a limited partner’s investment in the tax shelter (which was once common in tax shelters, see the example in Q 8687 for an illustration).
Despite this, the rules also apply to certain corporations and general partners in both limited and general partnerships and to non-leveraged 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.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.3