Under the K-1 at-risk rules, you can only deduct partnership or LLC losses up to the amount you could actually lose economically in the activity. That figure is generally your cash and property contributions, plus your share of any debt you’re personally liable to repay, plus (for real estate) qualified nonrecourse financing. Losses above that ceiling don’t disappear, but they’re suspended until your at-risk amount grows through new contributions, allocated income, or additional recourse debt. The number the IRS cares about is almost never the total liability figure printed on your K-1.
What the At-Risk Rule Is Doing
Section 465 exists to stop investors from deducting paper losses that exceed anything they could actually lose. Before the rule, a partner could put in $10,000, sign nothing, and still claim losses funded by debt no one had to repay. Section 465 closes that gap by limiting deductible losses to the amount you have economically exposed in the activity.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
It’s the second of four hurdles a K-1 loss has to clear before you can deduct it. Basis comes first: you can’t deduct a loss larger than your adjusted basis in the partnership interest, period.2Office of the Law Revision Counsel. 26 USC 705 – Determination of Basis of Partner’s Interest What survives basis then runs through at-risk. What survives at-risk runs through the passive activity rules under Section 469, and finally the excess business loss cap under Section 461(l).3Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited The K-1 instructions are explicit that the loss reported on the form does not account for any of these limits. Applying them is your job.4Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
What Counts Toward Your At-Risk Amount
Three things generally increase your at-risk amount in an activity:
- Cash you contribute to the partnership.
- The adjusted basis of other property you contribute.
- Amounts you borrow for use in the activity, if you’re personally liable for repayment. You can also count the net fair market value of personal assets you’ve pledged as security for the borrowing (other than assets used in the activity itself).1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
Your share of the partnership’s recourse debt increases your at-risk amount for the same reason: recourse means somebody has to pay it back with personal assets, and if that somebody is you, the exposure is real. A personal guarantee on partnership debt works the same way. Once you’ve signed, that debt is money you can lose.
The at-risk amount is a running number, not a one-time calculation. It goes up when the partnership allocates income to you, when you make additional contributions, and when your share of recourse debt increases. It goes down when losses are deducted against it, when distributions are made to you, and when your share of recourse debt decreases. It cannot fall below zero, but if prior losses have already been deducted and your at-risk amount later drops, you can be required to recapture some of those losses as income.
What Does Not Count
Amounts protected against loss generally don’t count toward your at-risk figure. That covers non-recourse financing (debt secured only by collateral, with no personal liability), guarantees running in your favor from someone else, and stop-loss agreements or similar arrangements.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk The theory is simple: if you can’t actually lose it, you can’t deduct losses funded by it.
The mechanics are unforgiving. Say you invest in a partnership by putting in $50,000 cash and having the partnership take out a $250,000 non-recourse loan attributable to your interest. Your basis may include the $250,000, but your at-risk amount is $50,000. A K-1 showing a $100,000 loss allocated to you passes the basis test but hits the at-risk wall at $50,000. The other $50,000 is suspended.
The Real Estate Carve-Out: Qualified Nonrecourse Financing
Real estate gets a meaningful exception. Qualified nonrecourse financing counts toward your at-risk amount even though nobody is personally liable to repay it. To qualify, the debt must be:
- Used to hold real property,
- Borrowed from a bank, another qualified lender, or a government entity, and
- Secured by the real property itself.1Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
The debt cannot be convertible, and it cannot come from the seller of the property or a related party unless the terms mirror what an unrelated commercial lender would offer.5eCFR. 26 CFR 1.465-27 – Qualified Nonrecourse Financing
The practical effect is significant. A partner in a real estate partnership can be at risk for their share of the building’s mortgage without ever signing a personal guarantee, which lets depreciation losses flow through and offset other income (subject to the remaining hurdles, especially the passive activity rules). This is one of the reasons real estate partnerships remain attractive to tax-oriented investors.
Finding the Numbers on Your K-1
Item K1 of Schedule K-1 splits your share of partnership liabilities into three lines: nonrecourse liabilities, qualified nonrecourse financing, and recourse liabilities, each shown as a beginning and ending balance.6Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025) For at-risk purposes, the recourse figure and the qualified nonrecourse financing figure are generally the ones that count. The plain nonrecourse line generally does not, because it’s neither personally guaranteed nor qualified real estate debt.
If the partnership conducts more than one activity subject to Section 465, it should give you a separate liability breakdown for each activity. Don’t collapse them. The at-risk limit is applied activity by activity, and mixing them can produce a deduction the IRS will disallow.
A workable formula for a single activity:
Cash and property contributed + share of recourse debt + qualified nonrecourse financing − losses previously deducted − distributions received = at-risk amount.
Overstating it costs you on audit; understating it costs you deductions you were entitled to take.
Form 6198 and Suspended Losses
When you have amounts not at risk in an activity that produced a loss, you calculate the deductible portion on Form 6198 and attach it to your return.7Internal Revenue Service. Instructions for Form 6198 (Rev. November 2025) Form 6198 does two things: it computes how much of the current year’s loss is allowed, and it tracks what carries forward.
Suspended at-risk losses aren’t lost. They carry forward indefinitely and become deductible in a later year when your at-risk amount goes up, whether through new contributions, allocated income, or assumption of recourse debt. If your basis was the initial bottleneck rather than at-risk, the loss releases as basis is restored. A partner who has been stacking suspended losses for years often sees them free up on a full disposition of the interest, though the interaction with the passive loss rules on disposition is its own analysis.
Where At-Risk Sits Among the Other Limits
Clearing the at-risk hurdle is necessary but not sufficient. A loss that survives basis and at-risk can still be blocked by the passive activity rules if you don’t materially participate in the business. Most limited partners and hands-off LLC members are passive by default, and passive losses can only offset passive income; they can’t shelter wages or portfolio income.3Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Material participation has several tests, the most common being more than 500 hours in the activity during the year.8eCFR. 26 CFR 1.469-5T – Material Participation (Temporary)
After passive, there’s one more cap. Section 461(l) limits the total net business loss an individual can deduct in a year. For 2025, the threshold is $313,000 for single filers and $626,000 for joint filers, indexed for inflation, with the excess converted into a net operating loss carryforward.9Internal Revenue Service. Instructions for Form 461 It mainly hits investors with large loss allocations from several ventures, but it applies after the other three limits have already been run.
The sequence matters. Losses stopped at basis never reach at-risk. Losses stopped at at-risk never reach passive. Each hurdle has its own carryforward, and a loss can be sitting in more than one queue depending on why it was stopped. Keeping the calculations separate, year by year, is the only way to know what’s actually deductible and what’s waiting.