What Is Form 6198? At-Risk Limits, Filing, and Recapture

Form 6198 is the IRS form you file to figure out how much of a business or investment loss you can actually deduct after applying the at-risk rules. Those rules cap your deductible loss at the amount of money and property you could genuinely lose in the activity. Any loss above that cap is not gone; it carries forward to future years until your at-risk amount grows enough to absorb it.

Who Has to File Form 6198

You file Form 6198 in any year you report a loss from an activity covered by the at-risk rules. The rules reach individuals, estates, trusts, and closely held C corporations, meaning C corporations in which five or fewer people own more than half of the stock.¹ In a profitable year you skip the form, because the at-risk limitation only restricts losses.

Partnerships and S corporations do not file Form 6198 themselves. If you are a partner or shareholder, you complete your own form based on your individual share of the activity’s loss, since the at-risk rules apply at the taxpayer level. Individuals attach it to Form 1040; estates and trusts attach it to Form 1041.² You need a separate Form 6198 for each activity with a loss, unless the rules let you group activities together.

Activities the At-Risk Rules Cover

Five categories are named specifically in the statute:¹

Farming operated as a trade or business or for the production of income.
Exploring for or extracting oil and gas.
Exploring for or extracting geothermal deposits.
Leasing depreciable tangible personal property (section 1245 property).
Holding, producing, or distributing motion picture films or video tapes.

The rules also reach virtually any other trade or business activity whenever the venture uses borrowed money for which you are not personally liable.¹ For each of the named categories, each property or venture is generally its own activity, so a gain on one farm cannot be netted against a loss on another for at-risk purposes. Other trades or businesses can sometimes be grouped if you actively participate in managing them.³

What Counts as Being “At Risk”

Your amount at risk is the total you could actually lose in the activity. That includes:

Cash you invested.
The adjusted basis of property you contributed.
Amounts you borrowed for the activity when you are personally on the hook to repay (recourse debt).
Your share of the activity’s prior-year income that you left in the business.

You are not at risk for anything shielded from real loss. Borrowed money without personal liability does not count, and neither do amounts protected by guarantees, stop-loss agreements, or similar arrangements that insulate you economically.¹

The Real Estate Exception

There is one meaningful exception for real property. Certain nonrecourse loans secured by real property, known as “qualified nonrecourse financing,” can be treated as amounts at risk. The loan must come from a bank or other institution in the business of lending money, or from a federal, state, or local government. It cannot be convertible to an ownership interest, and no individual can be personally liable for repayment.⁴ Seller financing generally does not qualify, because the seller already has an interest in the property.⁵

Working Through the Four Parts of the Form

Form 6198 has four parts, each feeding into the next.⁶

Part I: Current Year Profit or Loss

Enter your profit or loss from the activity for the tax year, pulled from whatever form normally reports it: Schedule C for a sole proprietorship, Schedule E for rental real estate or a partnership interest, and so on. A net profit generally ends the exercise, since the at-risk rules only cap losses.

Part II: Simplified Computation

Part II is a shorter path for taxpayers who can readily document their current at-risk amount. You report the adjusted basis of your investment: initial investment plus additional contributions, minus withdrawals, depreciation, and losses already allowed. If your records support a clean calculation without tracing funds across many years, Part II may be enough. If not, use Part III.

Part III: Detailed Computation

Part III tracks your full history in the activity. You add increases such as cash contributions, income earned, and qualified nonrecourse financing, and subtract decreases such as distributions and prior-year losses deducted. You have to separate personal contributions from borrowed amounts, flag any nonrecourse debt, and account for anything protected by a guarantee or similar arrangement. The result is a precise at-risk figure as of year end.

Part IV: Deductible Loss

Part IV compares the loss from Part I with the at-risk amount from Part II or Part III. If the loss is smaller than or equal to your at-risk figure, you deduct it in full. If the loss is larger, the deduction is capped at your at-risk amount and the rest is suspended.⁷

What Happens to a Disallowed Loss

A loss you cannot deduct because of the at-risk cap is not lost. It carries forward automatically and is treated as a deduction from the same activity in the next tax year. There is no time limit; the suspended loss stays available indefinitely until your at-risk amount rises enough to absorb it.⁷ Your at-risk amount can grow through new cash contributions, new recourse borrowing, or income the activity produces in later years.

If you dispose of your entire interest in a passive activity in a fully taxable transaction to an unrelated buyer, any remaining suspended losses are generally allowed in full in the year of disposition, provided all gain or loss on the sale is recognized.⁷

Recapture When Your At-Risk Amount Goes Negative

Your at-risk amount can fall during a year even without a current-year loss. Distributions of cash or property from the activity reduce it. So do converting a recourse loan to nonrecourse, or signing a new guarantee or stop-loss arrangement that protects you from further loss.⁸

If those events push your at-risk amount below zero at year end, you must recapture part of the losses you already deducted. You add the negative amount to your return as ordinary income on Schedule 1 of Form 1040. The recaptured amount is then treated as a deduction from the activity in the following year, so you can claim it again once your at-risk amount recovers.³

Where Form 6198 Fits Among the Other Loss Limits

The at-risk limit is one of several hurdles a business loss may have to clear. The IRS applies them in this order:⁷

Basis limitations first. Your deductible share of a partnership or S corporation loss cannot exceed your basis in the entity.
At-risk limitations second, on Form 6198.
Passive activity limitations third, on Form 8582, if you do not materially participate in the activity.⁹
Excess business loss limitations last, on Form 461, which cap the total business losses noncorporate taxpayers can use against nonbusiness income in a single year. For 2025 the threshold was $313,000 for single filers and $626,000 for joint filers, adjusted annually for inflation.¹⁰

A loss blocked at the at-risk stage never reaches the passive activity calculation. It stays suspended under the at-risk rules until your at-risk amount grows. The order matters because it decides which form controls the carryforward and which set of rules eventually releases the deduction.

Filing the Form

Form 6198 attaches to your main federal return: Form 1040 for individuals, Form 1041 for estates and trusts.² You can file electronically through tax software or on paper by mailing your return to the IRS service center for your region. The deductible loss the form produces flows to whatever schedule you normally use for the activity, such as Schedule C or Schedule E.⁶ The current form and instructions are on the IRS website.

If you claim a loss from an at-risk activity and skip Form 6198, the IRS may disallow the entire loss and assess an accuracy-related penalty of 20 percent of the resulting underpayment.¹¹

1
Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
2
Internal Revenue Service. About Form 6198, At-Risk Limitations
3
Office of the Law Revision Counsel. 26 U.S. Code 465 – Deductions Limited to Amount at Risk
4
eCFR. 26 CFR 1.465-27 – Qualified Nonrecourse Financing
5
LII / Legal Information Institute. 26 USC 465(b)(6) – Definition: Qualified Nonrecourse Financing
6
Internal Revenue Service. Instructions for Form 6198 (11/2025)
7
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
8
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules – Section: Reductions of Amounts at Risk
9
Internal Revenue Service. Instructions for Form 8582
10
Internal Revenue Service. Instructions for Form 461
11
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments