At-Risk Rules for Limited Partners in Real Estate Deals
A limited partner's at-risk amount is, in general, the cash and adjusted basis of property they contributed plus borrowed amounts they are personally liable for (IRC 465(b)). Limited partners are rarely liable for a syndication's mortgage, but for real estate there is an exception: your share of qualified nonrecourse financing secured by the property counts as at risk (465(b)(6)). So in most apartment syndications financed by a bank or agency loan, an LP is at risk for their investment plus their share of that loan.
This post explains the at-risk rules on their own, where they sit among the four loss limits, and what can make a loan fail the test. For the passive rules that usually bite next, see passive loss carryovers. This is general information as of October 2026, not tax advice; ask your own tax adviser.
What are the at-risk rules?
IRC 465 limits losses from an activity to what you actually stand to lose. Section 465(a)(1) allows an individual's loss "only to the extent of the aggregate amount with respect to which the taxpayer is at risk ... for such activity at the close of the taxable year." Losses that fail the test are not lost: 465(a)(2) treats them as a deduction in the next year.
Section 465(b) defines at risk:
- Money and the adjusted basis of property you contributed to the activity.
- Borrowed amounts to the extent you are personally liable for repayment or have pledged other property (not used in the activity) as security.
Under those two rules alone, an LP in a syndication would be at risk only for their cash, because the mortgage is the partnership's and usually nonrecourse. That is where the real estate exception comes in.
Why are most syndication LPs at risk for the mortgage?
Section 465(b)(6) says that "in the case of an activity of holding real property, a taxpayer shall be considered at risk with respect to the taxpayer's share of any qualified nonrecourse financing which is secured by real property used in such activity."
Qualified nonrecourse financing must be:
- borrowed with respect to the activity of holding real property,
- from a qualified person or a federal, state or local government (or guaranteed by one),
- nonrecourse: no person personally liable for repayment (except as regulations allow), and
- not convertible debt.
A "qualified person" (section 49(a)(1)(D)(iv), as applied by 465(b)(6)(D)) is someone "actively and regularly engaged in the business of lending money" who is not related to you, not the person you acquired the property from (or related to them), and not someone receiving a fee for your investment in the property. The Form 6198 instructions give a bank or savings and loan as examples.
For a partnership, your share of the financing is based on your share of partnership liabilities under section 752 (465(b)(6)(C)). Your K-1 shows it: Item K1 lists your share of nonrecourse liabilities, qualified nonrecourse financing and recourse liabilities, and the K-1 instructions say you may generally use only the amounts next to "qualified nonrecourse financing" and "recourse" to figure your amount at risk.
In what order do the loss limits apply?
The Partner's Instructions for Schedule K-1 list them: "the basis limitations, the at-risk limitations, the passive activity limitations, and the excess business loss limitations." A loss must pass each in turn.
| Step | Rule | What it compares | Unused loss |
|---|---|---|---|
| 1. Basis | IRC 704(d) | Loss vs. your adjusted basis in the partnership interest (including your share of partnership liabilities) | Carried forward |
| 2. At risk | IRC 465 | Loss vs. your amount at risk (cash, plus QNF and recourse share) | Carried forward (465(a)(2)), filed on Form 6198 |
| 3. Passive | IRC 469 | Passive losses vs. passive income | Carried forward (469(b)), filed on Form 8582 |
| 4. Excess business loss | IRC 461(l) | Net business losses vs. the threshold | Treated as a net operating loss carryforward, filed on Form 461 |
For 2025, the Form 461 instructions set the excess business loss threshold at $313,000, or $626,000 on a joint return. Most syndication LPs never reach step 4, because the passive rules at step 3 hold the loss first.
Basis and at-risk usually match for an LP in a deal with an agency or bank loan, since both include the share of that loan. They diverge when part of the debt is not qualified nonrecourse financing.
Worked example: an LP's loss through all four limits
All numbers are hypothetical, for illustration only. They are not a projection or a tax calculation.
A deal raises $5,000,000 of equity and buys an apartment building with a $14,000,000 nonrecourse loan from a bank. An investor puts in $100,000, 2% of the equity, and Item K1 of their K-1 shows $280,000 of qualified nonrecourse financing (2% of $14,000,000; the actual share comes from the partnership's section 752 allocation). Cost segregation and bonus depreciation give the investor a first-year loss of $180,000 in box 2.
Case A: the loan is qualified nonrecourse financing.
| Limit | Amount | Loss allowed past this step |
|---|---|---|
| Basis: $100,000 + $280,000 share of liabilities | $380,000 | $180,000 |
| At risk: $100,000 cash + $280,000 QNF | $380,000 | $180,000 |
| Passive: investor has no passive income | $0 | $0; $180,000 suspended and carried forward |
| Excess business loss | not reached |
Case B: the same loan, but from the seller (seller financing). The seller is the person the property was acquired from, so the loan is not from a qualified person and is not QNF.
| Limit | Amount | Loss allowed past this step |
|---|---|---|
| Basis: still $100,000 + $280,000 share of liabilities | $380,000 | $180,000 |
| At risk: $100,000 cash only | $100,000 | $100,000; $80,000 carried forward under 465(a)(2) |
| Passive: no passive income | $0 | $0; $100,000 suspended under 469 |
In both cases the investor deducts nothing this year, but the losses are held for different reasons, and that matters later. In Case B, the $80,000 at-risk carryover is usable only when the at-risk amount grows (for example, from later income allocated to the investor), and only then does it reach the passive test. For an investor who qualifies as a real estate professional and has no passive limit, Case B allows $100,000 this year instead of $180,000.
One more rule: if distributions or debt changes push your at-risk amount below zero, 465(e) requires you to include the shortfall in income (up to losses previously allowed) and treat it as a deduction in the next year.
When do you file Form 6198?
The Form 6198 instructions say you file it if, during the year, you or a partnership you belong to "had any amounts not at risk ... invested in an at-risk activity ... that incurred a loss." In Case A, the investor's whole investment is at risk (cash plus QNF), so Form 6198 may not be required. In Case B, the seller loan is an amount not at risk, so the form is needed.
What to check each year:
- Item K1 of the K-1: is the deal's debt listed as qualified nonrecourse financing?
- The loan type: bank, agency or HUD-insured loans usually fit; seller notes, loans from the sponsor or its affiliates, and loans from someone paid a fee for your investment deserve a question. A related-party loan can still qualify if it is commercially reasonable and on substantially the same terms as loans to unrelated persons (465(b)(6)(D)(ii)).
- Your capital account and basis: see your capital account on the K-1 and our K-1 guide.
- Large distributions, such as a cash-out refinance, which lower basis and at-risk amounts; see cash-out refinance in a syndication.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings from their friends and followers under Rule 506(b) or 506(c), with verified accredited investors only. It does not arrange the building's loan and does not give tax advice. Each investor's K-1, including Item K1, is prepared by the deal's accountant (the sponsor's own, or DoorRaise's optional Property Books & Taxes service with a partner CPA) and delivered through DoorRaise as part of the $3,500 yearly fee. Fees are $1,500 to set up (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year.
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FAQ
What is a limited partner's at-risk amount?
Generally the cash and adjusted basis of property contributed, plus debt the LP is personally liable for. In real estate, the LP's share of qualified nonrecourse financing secured by the property is added under IRC 465(b)(6).
How do the limited partnership at-risk rules work?
A partner may deduct a loss from an activity only up to their amount at risk at year end. The disallowed part carries to the next year. The test applies after the basis limit and before the passive activity rules.
What are the at-risk rules in real estate?
The same IRC 465 rules apply, with one exception that matters: qualified nonrecourse financing (a nonrecourse loan from a commercial lender or government, secured by the real estate, not convertible) counts as at risk.
What is Form 6198?
The IRS form for figuring the at-risk limit. You file it when you had amounts not at risk invested in an at-risk activity that had a loss, such as a share of seller financing that is not qualified nonrecourse financing.
Can my at-risk amount be different from my basis?
Yes. Basis includes your share of all partnership liabilities; at-risk includes only qualified nonrecourse financing and debt you are liable for. A seller loan or a non-qualifying loan can make at-risk lower than basis.
Sources
- 26 U.S.C. 465: Deductions limited to amount at risk (Cornell LII)
- 26 U.S.C. 49: At-risk rules (qualified person definition) (Cornell LII)
- IRS: Instructions for Form 6198 (11/2025)
- IRS: Partner's Instructions for Schedule K-1 (Form 1065) (2025)
- IRS: Instructions for Form 461 (2025)
- IRS: Instructions for Form 8582 (2025)
This article is general information as of October 2026, not tax, legal or investment advice. The example is a simplified illustration, not a tax calculation. Ask your own tax adviser about your situation. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.