8694 / What rules apply for determining whether a taxpayer has amounts “at risk” when the taxpayer receives qualified nonrecourse financing with respect to the purchase of real property?

An investor in real estate (excluding mineral property) is considered at risk with respect to nonrecourse financing if:

(a)  no person is personally liable for repayment (except to the extent provided in regulations);

(b)  the financing is secured by real property used in the activity;

(c)  the financing is borrowed with respect to the activity of holding real property;

(d)  the financing is not convertible debt, and either (1) the financing is borrowed from a “qualified person” or represents a loan from any federal, state, or local government or instrumentality thereof, or is guaranteed by any federal, state, or local government, or (2) the financing is borrowed from a related person upon commercially reasonable terms that are substantially the same terms as loans involving unrelated persons.¹

A “qualified person” is one who is actively and regularly engaged in the business of lending money and who is not (1) related in certain ways to the investor, (2) the one from whom the taxpayer acquired the property (or related to such a person), or (3) a person who receives a fee with respect to the lessor’s investment in the real estate (or related to such a person).²

In the case of a partnership, a partner’s share of qualified nonrecourse financing of the partnership is determined on the basis of the partner’s share of such liabilities incurred in connection with the financing.³