At-Risk Rules

The at-risk rules, although still in effect, were largely supplanted in 1986 by the Passive Activity Rules. However, if you don't get socked by the passive activity rules, you must consider the at-risk rules.

The at-risk rules were designed to limit your tax losses from investments in certain activities to the amount of your economic risk. The most common scenario is using “nonrecourse” financing (you are not personally liable on the debt) to acquire a stake in certain business or investment activities, including:1

Holding, producing, or distributing movies or video tapes;

Farming;

Real estate leasing;

Oil and gas exploration and exploitation; and

Geothermal deposit exploration and exploitation.

The above activities were commonly associated with “tax shelters” prevalent in the 1970's and early 1980's.

You must treat any loss disallowed by the at-risk rules as a deduction from the same activity in the next tax year.2

If your losses are allowed, the losses are subject to recapture in later years if your amount at risk falls below zero.3