Financial Glossary
Form 6198 (At-Risk Limitations)
Form 6198 is the IRS form used to apply the at-risk rules, which limit the amount of loss a taxpayer can deduct from a business or investment activity to the amount they actually have at risk in that activity. The amount at risk generally includes cash and the basis of property contributed, plus certain amounts borrowed for which the taxpayer is personally liable. Losses that exceed the at-risk amount are suspended and carried forward to future years when the taxpayer has additional amounts at risk.
Problem & Application
Real-estate investors and partners in pass-through entities frequently run into the at-risk rules when financing a property with nonrecourse debt or contributing little personal capital, which can cap the losses they were counting on deducting. STR and rental owners who expect to offset other income with depreciation losses are often surprised that Form 6198 limits how much of that loss is currently usable. Understanding your at-risk amount before relying on a loss prevents an unwelcome tax-time adjustment.
In Short
Form 6198 ensures you can only deduct losses up to what you truly stand to lose, with the excess deferred rather than denied. Tracking your at-risk basis throughout the year keeps your loss expectations realistic.