At-Risk Rules for Landlords: When Your Losses Get Limited

TL;DR: The at-risk rules (IRC Section 465) cap the rental losses you can deduct at the amount of cash, adjusted basis, and personally-liable debt you actually have tied up in the property. Nonrecourse loans generally don't count unless they qualify as "qualified nonrecourse financing" secured by real property. Losses beyond that amount aren't lost forever — they carry forward on Form 6198 until you have more at risk or you sell.

_Last reviewed: August 2026 · 7 min read_

You bought a rental, spent money fixing it up, and now your tax software is telling you part of your loss isn't deductible this year. That's not a glitch — it's the at-risk rules doing exactly what they were designed to do. Here's what counts, what doesn't, and where the money you can't deduct actually goes.

Okoniq Property Hub keeps a running log of what you've spent on each property, so when your accountant asks what's at risk versus what's financed with nonrecourse debt, the numbers are already sorted by date and category instead of buried in a shoebox of receipts.

What are the at-risk rules and why do they exist?

The at-risk rules, found in IRC Section 465, stop landlords from deducting losses that exceed what they'd actually lose if the investment went to zero. Congress added this in 1976 to shut down tax shelters where people claimed huge paper losses on money they never risked personally.

For a rental property, your at-risk amount is generally: cash you put in, the adjusted basis of property you contributed, and debt you're personally liable to repay. If a bank could come after your other assets to collect on the loan, that debt counts. If the loan is nonrecourse — meaning the lender's only recourse is the property itself — it usually doesn't count, with one big exception for real estate called "qualified nonrecourse financing," which does count if it's secured by real property used in the rental activity.

Say you buy a $300,000 duplex with $60,000 cash and a $240,000 recourse mortgage. Your at-risk amount starts at $300,000. If that same loan were structured as qualified nonrecourse financing secured by the property, it would still count toward your at-risk basis under the real estate exception — this is one of the few places nonrecourse debt gets favorable treatment.

How much do you actually have "at risk" in a rental property?

Your at-risk amount is a running number, not a one-time calculation. It goes up when you add cash, take on qualifying recourse or qualified nonrecourse debt, or reinvest profits. It goes down when you take distributions, when the property depreciates, or when a loan converts from recourse to nonrecourse (say, if a lender releases you from personal liability).

Capital improvements increase your basis and can increase what you have at risk if you fund them with cash or personally-guaranteed debt. If you spend $18,000 upgrading electrical service — like moving from 100 amp to 200 amp service — that's added to basis, not expensed immediately, and it raises your at-risk figure by the amount you funded out of pocket or with recourse debt.

Ordinary repairs work differently. Routine maintenance, like the kind covered in fall roof maintenance jobs, gets deducted as a current expense rather than added to basis. That distinction matters for at-risk tracking because current expenses reduce your taxable income directly, while capital improvements only affect your at-risk amount and get recovered through depreciation over time.

How do the at-risk rules and passive activity loss rules stack?

They apply one after the other, and you have to clear both hurdles before a rental loss is deductible. At-risk limits come first (Form 6198), then passive activity loss limits (Form 8582) apply to whatever survives.

Most rental real estate is automatically a passive activity under IRC Section 469, regardless of how much time you spend on it, unless you qualify as a real estate professional. That means even if you have plenty at risk, a separate $25,000 special allowance caps how much rental loss you can deduct against other income if you actively participate in managing the property. That allowance phases out between $100,000 and $150,000 of modified adjusted gross income, disappearing completely above $150,000.

| Rule | What it limits | Key form | Carries forward? | |---|---|---|---| | At-risk (§465) | Losses beyond cash + basis + personally liable debt | Form 6198 | Yes, indefinitely | | Passive activity (§469) | Losses beyond $25,000 special allowance (phases out $100K-$150K MAGI) | Form 8582 | Yes, indefinitely |

A loss can pass the at-risk test and still get stuck at the passive loss stage, or vice versa. Both tests have to clear in the same year for the loss to hit your return.

What happens to losses that get suspended?

Suspended losses aren't gone, they're parked until you have more at risk or you dispose of the property. Once your at-risk amount increases — say you pay down a nonrecourse loan with cash, converting it to more personal skin in the game, or you contribute additional capital — the suspended loss becomes deductible up to that new amount.

Selling the property is the cleanest release valve. When you fully dispose of a rental in a taxable transaction, any remaining suspended at-risk losses and passive losses generally become deductible in that year, even if your income is otherwise too high for the usual allowances. This is why some landlords time a sale specifically to unlock years of stacked-up losses.

Keep in mind that losses tied to a foundation repair project — the kind detailed in foundation cracks that are serious versus cosmetic — can sit suspended for years if the work was financed with a nonrecourse loan. Tracking exactly how each repair was funded, cash versus recourse debt versus nonrecourse debt, is what determines whether that year's loss clears the at-risk hurdle at all.

Does repair financing method actually change your deduction?

Yes, and this trips up more landlords than the rules themselves. Two owners can spend identical amounts fixing a deck, following the same checklist for deck ledger board problems, and get different tax outcomes depending on how the $8,000 repair was funded. Pay cash or use a personally-guaranteed home equity loan, and the full amount counts toward at-risk basis. Fund it through a nonrecourse loan secured only by the rental itself and not the real estate exception, and it may not count at all.

This is why lenders, not just the property, matter for tax planning. A recourse personal loan and a nonrecourse loan secured by the same property can produce very different at-risk numbers even though the cash spent looks identical on a bank statement.

FAQ

Does a HELOC on my personal residence count toward at-risk for a rental?

Yes, if you're personally liable for repayment, a HELOC or personal loan used to fund a rental property counts as at-risk capital regardless of what secures it, since you remain on the hook to repay it from any of your assets.

Do partnerships and LLCs get different at-risk treatment?

Each partner or member calculates their own at-risk amount separately based on their share of contributed capital and any debt they're personally liable for, so two partners in the same LLC can have very different deductible losses in the same year.

Can seller financing count as at-risk?

Generally yes, if the seller-financed note makes you personally liable for repayment, it counts like any recourse debt; if it's structured as nonrecourse and doesn't meet the qualified nonrecourse financing exception, it typically doesn't.

What form reports at-risk limitations on my tax return?

Form 6198, Computation of Deductible Loss From an Activity Described in Section 465, calculates your allowed loss and carries the disallowed portion forward to next year.

Do the at-risk rules apply if I own rental property outright with no mortgage?

The rules still technically apply, but if you paid entirely in cash with no debt, your at-risk amount typically equals your full investment, so the limitation rarely bites unless you've taken large distributions or the property has depreciated significantly.

This is educational information, not tax advice. Talk to a CPA familiar with real estate about how the at-risk and passive activity loss rules apply to your specific properties and financing structure.