At Risk Rules

Tax laws limiting the amount of losses an investor (usually a limited partner) can claim. Only the amount actually at risk can be deducted.

Investopedia Says:
For example, if you have $20,000 at risk in an investment which generates $5000 in tax losses a year, the losses may only be used for 4 years (or until the investor puts more money in).

Tax laws that limit the amount of tax losses an investor (particularly a Limited Partner) can claim. At-risk rules were extended to real estate by the 1986 tax act, and apply to property placed in service after 1986. This means that losses on real estate investments will be deductible only to the extent of the amount of money the equity investor stands to lose.
Example: If an investor has $10,000 at risk in a real estate investment that generates $3,333 per year in tax losses, the losses may be used for only three years. Thereafter, the losses may be used only if the investor contributes more money or property (net of withdrawals) or becomes liable to repay borrowed money. Amounts at risk include:

• cash contributed to the activity

• borrowed money for which the investor is personally liable

• property pledged as security for the real estate activity, provided the property is not used in the activity

An exception is made for qualified third-party non-recourse financing. These loans may be treated as amounts at-risk provided:

• a third-party, unrelated to the investor, provides the loan

• the third-party lender is neither the seller of the property nor related to the seller

• the lender is not paid a fee with respect to the equity investor's investment in the property

Related parties: Non-recourse loans from related parties qualify as amounts at-risk only if the terms are "commercially reasonable" and on substantially the same terms as loans involving unrelated persons.

Partnerships: A partnership's non-recourse financing may increase a general or limited partner's amount at risk provided the financing is qualified non-recourse for both the partner and the partnership. However, the amount treated at risk cannot be more than the total qualified non-recourse financing at the partnership level.

Tax term. A taxpayer can deduct losses for tax purposes only to the degree of risk. At-risk amounts are restricted to the cash investment and the debt for which the taxpayer is personally liable. Assume an individual incurs losses from real estate activities of $40,000. If the cash investment and personal debt incurred were $35,000, the most that could be deducted as losses is $35,000. Note there is an expansion of the at-risk amounts to real estate only to include certain nonrecourse loans from qualified lenders.