At-Risk Limitations
The at-risk rules limit your losses from most activities to your amount at risk in the activity. The at-risk limits apply to certain closely held corporations (other than S corporations).
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The amount at risk generally equals:
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The money and the adjusted basis of property contributed by the taxpayer to the activity, and
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The money borrowed for the activity.
Closely held corporation. For the at-risk rules, a corporation is a closely held corporation if, at any time during the last half of the tax year, more than 50% in value of its outstanding stock is owned directly or indirectly by, or for, five or fewer individuals.
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To figure if more than 50% in value of the stock is owned by five or fewer individuals, apply the following rules.
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Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered owned proportionately by its shareholders, partners, or beneficiaries.
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An individual is considered to own the stock owned, directly or indirectly, by or for his or her family. Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants.
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If a person holds an option to buy stock, he or she is considered to be the owner of that stock.
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When applying rule (1) or (2), stock considered owned by a person under rule (1) or (3) is treated as actually owned by that person. Stock considered owned by an individual under rule (2) is not treated as owned by the individual for again applying rule (2) to consider another the
owner of that stock.
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Stock that may be considered owned by an individual under either rule (2) or (3) is considered owned by the individual under rule (3).
More information. For more information on the at-risk limits, see Publication 925.
Generally, if you have (a) a loss or other deduction from any
activity carried on as a trade or business or for the production of
income by the partnership and (b) amounts in the activity for which
you are not at risk, you will have to complete Form 6198, At-Risk
Limitations, to figure your allowable loss.
The at-risk rules generally limit the amount of loss and other
deductions that you can claim to the amount you could actually lose
in the activity. These losses and deductions include a loss on the
disposition of assets and the section 179 expense deduction.
However, if you acquired your partnership interest before 1987, the
at-risk rules do not apply to losses from an activity of holding
real property placed in service before 1987 by the partnership. The
activity of holding mineral property does not qualify for this
exception. The partnership should identify on an attachment to
Schedule K-1 the amount of any losses that are not subject to the
at-risk limitations.
Generally, you are not at risk for amounts such as the following:
Nonrecourse loans used to finance the activity, to acquire property
used in the activity, or to acquire your interest in the activity,
that are not secured by your own property (other than the property
used in the activity). See the instructions for item K on page 5 for
the exception for qualified nonrecourse financing secured by real
property.
Cash, property, or borrowed amounts used in the activity (or
contributed to the activity, or used to acquire your interest in the
activity) that are protected against loss by a guarantee, stop-loss
agreement, or other similar arrangement (excluding casualty
insurance and insurance against tort liability).
Amounts borrowed for use in the activity from a person who has an
interest in the activity, other than as a creditor, or who is
related, under section 465(b)(3), to a person (other than you)
having such an interest.
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