Definition
Tax rules that limit loss deductions to the amount of money an investor has genuinely risked in an investment, preventing deductions exceeding economic exposure.
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At-risk rules prevent investors from deducting losses exceeding their actual financial exposure. If you invest $50,000 in a rental property but borrow $200,000 with recourse (lender can sue you personally if you default), you're 'at risk' for $250,000. If you borrow non-recourse (lender can only foreclose, not pursue you for deficiency), you're only at risk for your $50,000 equity. At-risk rules limit deductions to actual at-risk amounts. If you have $50,000 at risk and the property loses $100,000, you can deduct only $50,000 of loss; the other $50,000 is suspended. At-risk rules apply to most investments (stocks, partnerships, rental property). They prevent abusive tax shelters where investors deduct losses far exceeding their actual investment. Real estate mortgages are typically considered at-risk amounts, making at-risk rules less restrictive in real estate than in other investments. Understanding your at-risk basis is important before investing—your true tax benefit is limited by at-risk amounts.
Pro Tip
Understand at-risk basis before investing. Non-recourse loans limit at-risk basis to equity; recourse loans increase it. At-risk basis directly limits your deductible losses.
Example
An investor puts $100,000 down on a $500,000 rental property with a $400,000 non-recourse loan. The investor is 'at risk' for $100,000 (the equity). Loss deductions are limited to $100,000, even if losses exceed that.