If property used in an activity is pledged as security for a debt, is the debt included in the at-risk amount?
Understand the Problem
The question is asking about the at-risk rules in taxation. Specifically, it's concerned with whether debt secured by property used in a business activity is included when calculating the amount a taxpayer has at risk. Understanding the at-risk rules is vital for determining the deductible losses from a business.
Answer
The debt is generally included in the at-risk amount, unless the property is financed by debt secured by that same property.
Generally, if you pledge property as security for a debt used in an activity, the debt is included in your at-risk amount. However, this excludes property that is directly or indirectly financed by debt secured by the same property.
Answer for screen readers
Generally, if you pledge property as security for a debt used in an activity, the debt is included in your at-risk amount. However, this excludes property that is directly or indirectly financed by debt secured by the same property.
More Information
The at-risk rules limit the amount of losses a taxpayer can deduct to the amount they could actually lose in an activity. This prevents taxpayers from deducting losses greater than their actual economic risk.
Tips
It's easy to misinterpret the at-risk rules, especially when dealing with debt and security. Focus on whether the taxpayer is ultimately liable for the debt and what property secures it.
Sources
- Revisiting at-risk rules for partnerships - The Tax Adviser - thetaxadviser.com
- Publication 925 (2023), Passive Activity and At-Risk Rules - IRS - irs.gov
- 26 U.S. Code ยง 465 - Deductions limited to amount at risk - law.cornell.edu
AI-generated content may contain errors. Please verify critical information
