Which of the following is TRUE regarding the 'at-risk' limitation for losses?

Answer options:

It applies before the basis limitation.

Nonrecourse debt generally does not increase the at-risk amount (except for qualified nonrecourse financing on real estate).

It applies only to passive activities.

Suspended at-risk losses are lost forever if the activity is sold.

How to approach this question

At-Risk = Skin in the game. Nonrecourse debt (except real estate) doesn't count.

Full Answer

B.Nonrecourse debt generally does not increase the at-risk amount (except for qualified nonrecourse financing on real estate).✓ Correct

The at-risk amount generally includes money/property contributed and amounts borrowed for which the taxpayer is personally liable (recourse). Nonrecourse debt does not increase the at-risk amount, with the major exception of qualified nonrecourse financing used in real estate.

Common mistakes

Thinking at-risk rules only apply to passive activities.

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