At-risk rules for rental property: what they limit and when Form 6198 applies
The at-risk rules limit a loss to the amount you could actually lose in the activity. For real estate, section 465(b)(6) treats qualified nonrecourse financing, such as a commercial bank mortgage on the property, as at risk, so most landlords with ordinary bank loans are not held back. Form 6198 is where the limit is figured when it matters.
What the at-risk rules are
The at-risk rule is in 26 U.S.C. section 465. For an individual, a loss from an activity is allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk. A loss above that amount is not lost forever: it carries forward to the next tax year.
Being at risk means roughly this: the cash and property you put in, plus loans you are personally liable to repay. It is a test of how much money you could lose if the activity failed. It is separate from the passive activity rules, and a loss has to pass both. The passive limits are in suspended passive rental losses.
Why most rental loans still count
Real estate has a special rule. Under section 465(b)(6), for an activity of holding real property, a taxpayer is considered at risk for the taxpayer's share of qualified nonrecourse financing that is secured by real property used in the activity. IRS Publication 925 says the same: you may be considered at risk for amounts secured by real property used in the activity of holding real property, if, as nonrecourse debt, they would qualify as qualified nonrecourse financing.
Under the statute, the financing generally has to be:
- borrowed for the activity of holding the real property,
- borrowed from a qualified person, or a loan from or guaranteed by a government,
- nonrecourse, meaning no person is personally liable for repayment, and
- not convertible debt.
A mortgage from a bank or other lender in the business of lending usually fits the "qualified person" test. A loan from the seller, a relative or a business partner is the kind that can fail it. Ask your preparer about any loan that did not come from a commercial lender.
A worked example
Example a made-up landlord puts $60,000 cash into a rental and finances $240,000 with a bank mortgage that qualifies as qualified nonrecourse financing. The at-risk amount starts at $60,000 plus $240,000, which is $300,000. A $15,000 first-year loss is far below $300,000, so the at-risk rule does not limit it.
Example the same landlord also borrows $50,000 from a friend, nonrecourse, to renovate. A friend is not a qualified person under the statute, so that $50,000 may not be at risk. At-risk is then $60,000 plus $240,000, which is $300,000, not $350,000. Check: the $50,000 is left out of the total until your preparer confirms the loan qualifies or you become personally liable for it.
When Form 6198 comes into it
Publication 925 says you must file Form 6198, At-Risk Limitations, if you are engaged in an activity covered by the at-risk rules and certain conditions apply, for example that you have borrowed amounts that are excluded from being at risk or that you have a loss and are not at risk for all your investment. If every dollar is at risk and the loss is within it, many landlords have nothing to limit.
The form is also where a disallowed amount is tracked as a carryforward. A loss you could not use this year because you ran out of at-risk amount waits for a year in which your at-risk amount grows, for instance when you put more cash in or the property produces income.
- List what you put into the activity, and any loan you are personally liable for.
- Check each loan for the qualified nonrecourse test, with the lender, whether it is nonrecourse, and what secures it.
- Subtract losses and distributions already taken, which lower your at-risk amount over time.
- Compare the current loss to the remaining at-risk amount, and carry forward any excess.
How it fits with the other loss limits
The order matters: basis comes first, then at-risk, then the passive activity rules. A loss has to clear all three. Most small landlords hit the passive rules, covered in deducting rental losses against other income, long before they hit at-risk, but a landlord with several partners, seller financing or a lot of owner loans should check it.
This post describes the rules and cites them. It is not tax advice, and your facts, like how each loan is documented, decide the result.
How DoorKeeping handles it
DoorKeeping keeps one set of books per property, with its loan, owner contributions and distributions in separate accounts, so the numbers your preparer needs for basis and at-risk are in one place. Ask Claude or ChatGPT for a contributions and distributions list for a property over any date range. DoorKeeping does not figure at-risk or fill in Form 6198, and it gives no tax advice.
Sources
- 26 U.S.C. section 465, Deductions limited to amount at risk, read Oct 30, 2026
- IRS, Publication 925, Passive Activity and At-Risk Rules, read Oct 30, 2026
Questions
- Do the at-risk rules apply to rental property?
- Yes, they can, but section 465(b)(6) treats qualified nonrecourse financing on real property as at risk, so many ordinary bank mortgages do not limit a loss.
- What is qualified nonrecourse financing?
- Generally a loan for holding real property, from a qualified lender or a government, that no person is personally liable to repay and that is not convertible.
- Do I always file Form 6198 for a rental?
- No. Publication 925 says to file it when certain conditions apply, such as amounts that are not at risk. Ask your preparer.
- What happens to a loss that is limited?
- It carries forward to the next tax year under section 465(a)(2).