Tax
IRC Section 465 (At-Risk Rules)
Federal tax rules that limit how much loss a passthrough owner can deduct to the amount they actually have at risk in the activity: cash contributed, adjusted basis of property contributed, and personally-guaranteed recourse debt.
Section 465 is the second of three loss-limitation walls Congress built around passthrough losses. Ordering: (1) basis limits under §704(d) / §1366(d), (2) at-risk limits under §465, (3) passive activity limits under §469. A loss must clear each wall in turn to be deductible in the current year; disallowed amounts carry forward.
At-risk is narrower than basis. The owner's basis can include their share of the entity's non-recourse debt (for real estate specifically, qualified non-recourse financing counts as at-risk too). Ordinary non-recourse debt does not count as at-risk. Guarantees are at-risk only when the guarantor has no meaningful right of subrogation against another guarantor.
The rule bites hardest in real-estate partnerships financed with pure non-recourse debt (basis exists, but at-risk is capped at cash plus recourse) and in tiered structures where the owner is far removed from the personal-guarantee. Losses stuck at the §465 wall carry forward until at-risk amount is restored, typically by additional capital or by income allocations.
Common pitfalls
- Assuming basis and at-risk are the same number — they diverge whenever non-recourse debt is in the entity
- Signing a personal guarantee with a subrogation right against the other partners; the IRS treats that as effectively no guarantee for §465 purposes
- Missing the annual Form 6198 filing for each activity; the form is how the at-risk amount is documented, and its absence weakens the position under audit
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