What are At-Risk Rules?

4 minute read

At-risk rules are a set of regulations set by the IRS that limit the amount of loss a taxpayer can claim on a business or rental property. These rules are put in place to prevent taxpayers from claiming losses on business and rental property that exceed their investment. In other words, the IRS wants to make sure that taxpayers are only claiming losses on property that they are actually at risk of losing money on.

These rules generally apply to individuals, partners in a Partnership and shareholders in a S Corporation.  Also, closely-held C Corporations in which 50% or more of the ownership is split between 5 or fewer individuals. The at-risk rules limit the amount of loss that can be claimed on the amount of money the taxpayer has invested, plus any borrowed money that is secured by the taxpayer who is personally liable for repayment or has pledged property other than property used in the activity as security for the debt.. Any loss in excess of these amounts is not allowed to be claimed until the taxpayer has an additional at-risk basis in the property.

What is Publication 925?

Passive activities, such as rental properties, can be tricky to navigate, but Publication 925 acts as a compass, showing how to calculate and report passive activity losses on tax return. It's a must-read for any savvy taxpayer or tax professional, as it details the rules and provides real-life examples of how to claim the hidden treasure of passive loss deductions.

How do At-Risk Rules Apply to Rentals?

At-risk rules apply to rentals by limiting the amount of loss a taxpayer can claim on rental property to the amount of money they have invested in the property, plus any borrowed money that is secured by the property.” The purpose of these rules is to prevent taxpayers from claiming losses on rental property that exceed their investment in the property. In other words, the IRS wants to make sure that taxpayers are only claiming losses on rental property that they are actually at risk of losing money on.

When it comes to rental properties, the at-risk rules limit the amount of loss that can be claimed on the income tax return to the amount of money the taxpayer has invested in the property, such as the purchase price, plus any improvements made to the property, plus any borrowed money that is secured by the property. Any loss in excess of these amounts is not allowed to be claimed until the taxpayer has an additional at-risk basis in the property. It's important to note that these rules apply to all types of rental properties, including residential, commercial, and industrial properties.

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Conclusion

At-risk rules are a necessary measure put in place by the IRS to ensure that taxpayers are only claiming losses on rental property that they are truly at risk of losing money on. These rules apply to individuals, partnerships, and S corporations and limit the amount of loss that can be claimed on rental property to the amount of money the taxpayer has invested in the property, plus any borrowed money that is secured by the property. Understanding and adhering to these rules is important for any individual or business that owns rental property and wants to claim losses on their income tax return.


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