J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.18 What Is At Risk?

The following amounts are considered at risk in determining your tax position in a business or investment:

Cash;

Adjusted basis of property that you contribute; and

Borrowed funds for which you are personally liable for repayment.

Personal liability alone does not assure that the borrowed funds are considered at risk. The lender generally must have no interest in the venture other than as a creditor and must not be related to a person (other than the borrower) with an interest in the activity other than that of a creditor. Under final IRS regulations, a lender or person related to the lender is considered to have an interest other than that of a creditor only if the person has a capital interest in the activity or an interest in the net profits of the activity. However, even if the lender has such an interest, a loan after May 3, 2004, for which you are personally liable is treated as at risk if: (1) the loan is secured by real estate used in the activity and (2) the loan, were it nonrecourse, would be qualified nonrecourse financing, as discussed below.

At-risk basis is figured as of the end of the year. Any loss allowed for a year reduces the at-risk amount as of the start of the next year. Therefore, if a loss exceeds your at-risk investment, the excess loss will not be deductible in later years unless you increase your at-risk investment; see the Example below and 10.21.

EXAMPLE

Julie Kahn, an investor, pays a promoter of a book purchase plan ...