At-risk Rule

An investor contributes $20,000 cash to a limited partnership and personally guarantees repayment of $5,000 of the partnership's recourse bank debt. The partnership separately carries $50,000 of nonrecourse debt that does not meet the definition of qualified nonrecourse financing. What is the investor's at-risk amount? (Figures are illustrative only.)

1. A.$75,000, because all partnership-level debt is included regardless of recourse.Wrong. This adds the full $50,000 of nonqualified nonrecourse debt into at-risk basis, but that debt fails the qualified-nonrecourse-financing exception and stays excluded.
2. B.$20,000, counting only the cash contribution.Wrong. This captures the cash contribution but drops the $5,000 of recourse debt the investor personally guaranteed, which belongs in the at-risk amount.
3. C.$5,000, counting only the guaranteed recourse debt.Wrong. This counts only the guaranteed recourse debt and omits the $20,000 cash contribution, which is also part of at-risk basis.
4. D.$25,000.Correct. At-risk basis is the $20,000 contributed plus the $5,000 of recourse debt personally guaranteed; the nonqualified nonrecourse debt is excluded.

Why: At-risk basis totals what the partner has actually put at economic risk: the $20,000 cash contribution plus the $5,000 of partnership debt the investor personally guaranteed, for $25,000. The $50,000 of nonrecourse debt does not count because it fails the qualified-nonrecourse-financing exception and no partner is personally liable for it, so it sits outside the at-risk computation entirely regardless of its size. If that $50,000 had instead been secured by real property from an unrelated qualified lender, it would be added in as qualified nonrecourse financing and the at-risk amount would rise to $75,000.

An investor contributes to a limited partnership a parcel of land with a fair market value of $50,000 and an adjusted basis of $30,000. The partnership assumes no debt in connection with the contribution. What is the investor's at-risk amount from this contribution? (Figures are illustrative only.)

1. A.$50,000, the fair market value of the landWrong. Fair market value is not the measure used; at-risk basis follows adjusted basis, the same figure carried into the partner's outside basis.
2. B.$20,000, the built-in gain on the landWrong. The built-in gain is not itself at-risk basis; it is the excess of value over the basis actually used for the at-risk computation.
3. C.$30,000, the adjusted basis of the landCorrect. At-risk basis from a contributed asset equals its adjusted basis, not its fair market value.
4. D.$0, because property contributions, unlike cash, never create at-risk basisWrong. Contributed property creates at-risk basis measured at adjusted basis; only cash is excluded from that rule, not property.

Why: At-risk basis from a property contribution is measured by the property's adjusted basis, the same starting point used for the partner's outside basis, not by its market value.

Ines draws a salary, receives dividends and interest in a brokerage account, and is allocated a loss from a real estate program in which she is a limited partner. Against which of those may the allocated loss be deducted this year?

1. A.Against neither the salary nor the dividends and interestCorrect. Both categories are nonpassive, so the loss is suspended until passive income appears.
2. B.Against the dividends and interest, but not against the salaryWrong. Portfolio income is not passive income merely because it requires no effort to receive.
3. C.Against the salary, but not against the dividends and interestWrong. Wages are the clearest example of income a passive loss cannot touch.
4. D.Against both, so long as her basis and at-risk amount cover the lossWrong. Satisfying the first two limitations does not dissolve the third one.

Why: Passive losses may be deducted only against passive income. Salary is earned income and dividends and interest are portfolio income, so neither category is available to absorb the allocated loss. The loss is suspended and carried forward until Ines has passive income to set against it. If she acquired an interest in another program that allocated her passive income, the suspended loss would become deductible up to that amount.

Losses allocated to a limited partner by a direct participation program are deductible by that partner:

1. A.Against any income the partner reports, provided the partner's basis is large enough to absorb itWrong. It stops at the basis limitation and never reaches the passive rule that follows it.
2. B.Against the partner's earned income such as salary, but not against dividends and interestWrong. Salary is the one category the passive rule most clearly walls the loss away from.
3. C.Against the partner's dividends and interest, but not against salary or self-employment incomeWrong. Portfolio income is nonpassive, so it cannot absorb an allocated program loss either.
4. D.Only to the extent of the passive income the partner reports for the yearCorrect. Passive income sets the ceiling, and anything above it is suspended rather than deducted.

Why: Losses from a direct participation program are passive losses in the hands of a limited partner, and passive losses are deductible only to the extent of the partner's passive income. Earned income such as salary and portfolio income such as dividends and interest both sit outside that category. Basis and the at-risk amount are separate limitations that can cut a loss down further; clearing them does not make a passive loss usable against nonpassive income. If the partner held passive income from another program, the loss would become deductible up to that amount.