How does the at-risk rule apply to partnership losses?

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Casey Epton, CPA, is a Senior Tax Advisor at Deduction, where he helped design Taylor, CPAI from day one, building an AI tax agent that works seamlessly for both clients and the CPAs who verify every return.

Last updated:

Sep 2026

The at-risk rules limit the amount of partnership losses a partner may deduct to the amount the partner is economically at risk for in the activity. Even if a partnership allocates a loss to you on Schedule K-1, you can deduct it only up to your at-risk amount for the year.

What Is the At-Risk Rule?

Under IRC §465, a taxpayer may deduct losses from certain activities only to the extent they are at risk, meaning amounts the taxpayer could actually lose if the activity fails.

The at-risk limitation is applied before the passive activity loss rules.

How the At-Risk Rule Works for Partnerships

Step 1: Determine Your At-Risk Amount

Your at-risk amount generally includes:

Cash contributions to the partnership
Adjusted basis of property contributed
Your share of partnership income (increases at risk)
Recourse partnership liabilities for which you are personally liable
Qualified nonrecourse financing (generally real estate only)

Your at-risk amount is reduced by:

Distributions
Your share of partnership losses
Certain nonrecourse liabilities (most cases)

Step 2: Compare At-Risk Amount to Allocated Loss

If your at-risk amount ≥ allocated loss → loss may be deductible
If your at-risk amount < allocated loss → excess loss is disallowed and carried forward

Recourse vs Nonrecourse Debt

Recourse Debt

You are personally liable
Increases your at-risk amount

Nonrecourse Debt

You are not personally liable
Does NOT increase your at-risk amount
Exception: Qualified nonrecourse financing (real estate)

Most limited partners and LLC members are not at risk for nonrecourse debt.

Example

Cash contributed: $40,000
Share of recourse debt: $10,000
Total at-risk amount: $50,000

Partnership allocates a $70,000 loss to the partner.

Deductible loss (2025): $50,000
Disallowed loss: $20,000 (carried forward)

The suspended $20,000 becomes deductible in a later year when the at-risk amount increases.

Interaction With Passive Activity Loss Rules

Order of limitations:

At-risk rules (§465)
Passive activity loss rules (§469)
Basis limitation (§704(d))

Even if a loss passes the at-risk test, it may still be:

Suspended as a passive loss, or
Limited by outside basis

Reporting Requirements

At-risk limitations are calculated at the partner level
Suspended losses are tracked year-to-year
Disclosure may be required on Form 6198 when applicable

Summary

Item	At-Risk Treatment
Cash contributed	At risk
Recourse debt	At risk
Nonrecourse debt	Not at risk
Qualified nonrecourse financing	At risk (real estate)
Loss exceeds at-risk amount	Suspended

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