ExpertHard1 markMultiple Choice
CPA · Question 68 · Area IV: Individual Taxation
Which of the following is TRUE regarding the 'at-risk' limitation for losses?
Which of the following is TRUE regarding the 'at-risk' limitation for losses?
Answer options:
A.
It applies before the basis limitation.
B.
Nonrecourse debt generally does not increase the at-risk amount (except for qualified nonrecourse financing on real estate).
C.
It applies only to passive activities.
D.
Suspended at-risk losses are lost forever if the activity is sold.
How to approach this question
At-Risk = Skin in the game. Nonrecourse debt (except real estate) doesn't count.
Full Answer
B.Nonrecourse debt generally does not increase the at-risk amount (except for qualified nonrecourse financing on real estate).✓ Correct
The at-risk amount generally includes money/property contributed and amounts borrowed for which the taxpayer is personally liable (recourse). Nonrecourse debt does not increase the at-risk amount, with the major exception of qualified nonrecourse financing used in real estate.
Common mistakes
Thinking at-risk rules only apply to passive activities.
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