8693 / What rules apply in determining a taxpayer’s amount “at risk” when the taxpayer has borrowed the funds that have contributed to the activity?
In general, if an individual borrows the money contributed to an activity (or, in the case of a limited partnership, the money with which the interest is purchased), the individual is “at risk” only to the extent the individual is personally liable to repay such amounts, or to the extent property is pledged that is not otherwise used in the activity as security for the loan.1
If the individual borrowed funds to purchase the property contributed to the activity, the individual is “at risk” with respect to such property only to the extent that the individual would have been “at risk” had the borrowed funds themselves been contributed instead of the purchased property.2
If an individual is personally liable for amounts borrowed in the conduct of the activity, the individual is “at risk” to the extent of such amounts even if property used in the activity is also pledged as security for such amounts.3 The fact that the partnership or other partners are in the chain of liability does not reduce the amount a partner is “at risk” if the partner bears ultimate responsibility.4