At-Risk & Basis Rules

Multiple limitation rules may restrict the deductibility of losses from business and investment activities. These rules apply in a specific order and must each be satisfied before a loss can offset other income.

Order of Application

1. Basis Limitation:Losses cannot exceed the taxpayer's adjusted basis in the activity

2. At-Risk Rules (§465):Losses limited to amounts the taxpayer has at risk

3. Passive Activity Rules (§469):Passive losses can only offset passive income

4. Excess Business Loss Rules (§461(l)):Additional limitations on aggregate business losses

At-Risk Amounts

A taxpayer is generally at risk for:

• Cash contributions to the activity

• Adjusted basis of property contributed

• Amounts borrowed for use in the activity for which the taxpayer has personal liability

• Certain qualified nonrecourse financing for real estate activities

Carryforward Rules

Losses disallowed under any of these rules are generally carried forward to future years and become deductible when the applicable limitation is satisfied.

Tax outcomes depend on facts and circumstances. This content is for educational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.