What are the at-risk rules?

What the rules do

Publication 925 describes two separate ceilings on losses from a trade, business, rental or other income-producing activity. The passive activity rules ask whether you worked in the activity. The at-risk rules ask something simpler and earlier in the order of operations: how much money could you actually lose? Your loss from an activity is limited to your amount at risk in that activity. Any loss that is disallowed is not gone; it is treated as a deduction from the same activity in the next tax year. And because the rules stack, the publication says you must apply the at-risk limits before the passive activity limits. Partners and S corporation shareholders face a fixed order of their own: first the adjusted basis of the partnership interest or stock (plus loans to the corporation, for shareholders), then at-risk, then passive activity, and after those the excess business loss limit on Form 461.

Who is affected, and which activities

The limits apply to individuals, including partners and S corporation shareholders, to estates, to trusts, and to certain closely held C corporations. A C corporation is closely held for this purpose if, at any time in the last half of the year, more than 50% in value of its stock is owned directly or indirectly by or for five or fewer individuals. Ownership attributes through entities and through family, which for this test means brothers and sisters, a spouse, ancestors and lineal descendants.

The rules cover five named activities: holding, producing or distributing motion picture films or video tapes; farming; leasing section 1245 property (depreciable personal property and certain other tangible property); exploring for or exploiting oil and gas; and exploring for or exploiting geothermal deposits. A sixth bucket catches any other activity carried on as a trade or business or for the production of income, so an ordinary small business or investment is within reach. The 2025 edition notes that qualified production property, added by the One Big Beautiful Bill Act, now counts as section 1245 property.

There are exceptions. The rules do not apply to holding real property that was placed in service before 1987, nor to an interest acquired before 1987 in a pass-through that holds such property. A closely held corporation actively leasing equipment (50% or more of gross receipts from equipment leasing) treats that as a separate activity outside the rules, and a qualified corporation is free of the limit for a qualifying business, which needs at least one full-time employee in active management and three full-time nonowner employees for the whole 12 months, among other conditions.

What counts as at risk

You are at risk for the money and the adjusted basis of property you contribute. You are also at risk for amounts you borrow for use in the activity if you are personally liable to repay them, or if you pledge property that is not used in the activity as security. In the pledged case the amount at risk is the net fair market value of your interest in the pledged property, which means its value on the day it is pledged less any prior claims. Property cannot count as security if it was financed by debt secured by property you contributed to the activity.

Two traps catch people. First, you can increase your amount at risk only once: if you borrow money to finance a contribution, you cannot count both the contribution and the loan. Second, borrowing from a person with an interest in the activity, or from someone related to that person, does not make you at risk even when you are personally liable. The publication lists the exceptions (a shareholder lending to a corporation, a creditor-only interest, and certain post-May 3, 2004 real property loans) and a long list of related persons, which includes siblings, spouse, ancestors and descendants and, among others, a corporation and an owner of more than 10% of its value.

What does not count

You are not at risk for amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements or similar arrangements. Nonrecourse debt is borrowing where the lender can look only to the activity or its property, so your share of it does not increase your amount at risk unless the loan is secured by property outside the activity. The big carve-out is qualified nonrecourse financing on real property: when you hold real property, financing with no personal liability that is secured by that real property, not convertible to equity, and borrowed from or guaranteed by a government or borrowed from a qualified person (someone who regularly lends money, most commonly a bank) counts as at risk. A related lender can qualify only if the loan is commercially reasonable and on the same terms as loans involving unrelated persons.

Insurance matters too. If you are personally liable on a mortgage but buy insurance that reimburses you for payments you must make, you are at risk only for the uninsured portion, though you can include premiums you paid from personal assets. Ordinary casualty or liability insurance does not reduce your at-risk amount.

A worked example with the checker

Suppose you put $20,000 of cash into a farming partnership venture and personally guarantee a $15,000 bank loan used in it. You also have $30,000 of nonrecourse debt that is not qualified nonrecourse financing. Your amount at risk is $35,000, because the nonrecourse $30,000 is excluded. If the activity produces a $40,000 loss this year, you can deduct $35,000 and $5,000 is suspended into next year. Your at-risk amount then drops to zero, because every allowed loss and every distribution reduces it. Enter those numbers above to see it. This is an illustration built from the publication's rules, not a figure from the publication.

Next year and the years after

Allowed losses reduce your amount at risk, but not below zero, at the start of the next year. A suspended loss will not be allowed later unless your at-risk amount rises. If it does, you can deduct suspended losses to the extent the increase exceeds your losses in later years. Even then the passive activity rules may still limit the deduction, since the two sets of limits are applied in sequence.

Recapture and Form 6198

If your at-risk amount is below zero at the end of any year, you must recapture previously allowed losses by adding income to the activity. The addition is the lesser of the negative at-risk amount, treated as positive, and the total losses deducted in prior years beginning after 1978, less amounts you recaptured before. Recapture income does not reduce a net loss for the year; it is treated as a deduction for the activity in the next year. Reductions that can push you below zero include prior allowed losses, distributions, a debt changing from recourse to nonrecourse, and the start of a stop-loss arrangement.

You file Form 6198 with your return if you have a loss from any part of an activity covered by the rules and you are not at risk for some of your investment. You also file it if you are in a catch-all business or investment activity (the sixth category above) and you have borrowed amounts of the excluded type described earlier, such as money lent by a person with an interest in the activity.

Sources

• IRS Publication 925, Passive Activity and At-Risk Rules (2025): Passive Activity Limits (Who Must Use These Rules); At-Risk Limits (Loss defined, Form 6198, Loss limits for partners and S corporation shareholders); Who Is Affected; Activities Covered by the At-Risk Rules; At-Risk Amounts; Amounts Not at Risk; Reductions of Amounts at Risk; Recapture Rule. Read November 2, 2026.

Edition read: Publication 925 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.