Recourse Debt

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.

A limited partner is looking for a source of debt that will genuinely increase her at-risk amount. Which of the following would do so?

1. A.A loan from an unrelated bank for which she is personally, unconditionally liable, with no right of reimbursement from any other party.Correct. Genuine recourse liability to an unrelated lender, with no reimbursement right, increases at-risk amount.
2. B.A nonrecourse loan secured by the partnership's equipment, from a bank unrelated to the sponsor.Wrong. Equipment is not real property, so this nonrecourse debt has no qualified-nonrecourse-financing carve-out to rely on and stays excluded from at-risk.
3. C.A recourse loan from the partnership's general partner, for which she is personally liable.Wrong. A lender with an interest in the activity other than as a creditor, such as the general partner, is excluded from at-risk regardless of recourse liability.
4. D.A recourse loan from an unrelated bank for which she is personally liable, fully covered by a reimbursement agreement with the sponsor.Wrong. A binding reimbursement right shifts the real economic risk of loss away from her, so the loan adds nothing to at-risk despite her nominal personal liability.

Why: Only a loan from a genuinely unrelated lender, for which the partner is personally liable with no right of reimbursement, increases at-risk amount. Equipment nonrecourse debt has no qualified-nonrecourse-financing carve-out to fall back on, a related-party lender is excluded outright regardless of recourse status, and a reimbursed guarantee shifts the real economic risk away from the guarantor.

A limited partner's capital account, as maintained on the partnership's books, has fallen to zero after several years of allocated losses and cash distributions. She has also personally guaranteed $18,000 of the partnership's recourse debt, with no right of reimbursement. Does her at-risk amount also stand at zero? (Figures are illustrative only.)

1. A.Yes, because the capital account and the at-risk amount are the same figure computed under different namesWrong. They are distinct measures; the capital account is a book record while the at-risk amount separately captures personally guaranteed recourse debt.
2. B.Yes, because once a partner's capital account reaches zero, the at-risk rules deem all further debt nonrecourse regardless of personal guaranteesWrong. There is no such deeming rule; a personal guarantee with no reimbursement right creates at-risk basis regardless of what the capital account shows.
3. C.No, because a capital account can never fall below the partner's original cash contribution, so the two figures cannot both be at different levelsWrong. A capital account can absolutely fall to zero or below through allocated losses and distributions; that premise about capital accounts is false.
4. D.No, because her at-risk amount separately includes the $18,000 of recourse debt she personally guarantees, which is not reflected in the book capital accountCorrect. The guaranteed recourse debt is a separate source of at-risk basis that does not run through the book capital account, so her at-risk amount can be above zero even though her capital account is not.

Why: The book capital account and the at-risk amount are two distinct measures. The capital account tracks contributions, allocated income and loss, and distributions on the partnership's books; the at-risk amount separately includes personally guaranteed recourse debt that never appears in the capital account at all.

A limited partner's outside (tax) basis in her partnership interest is $60,000, which includes her $18,000 share of the partnership's nonrecourse debt that does not meet the qualified nonrecourse financing exception. Her at-risk amount, which excludes that $18,000 of nonrecourse debt, is $42,000. The partnership allocates her a $50,000 loss for the year, and she has no other passive income. How much of the $50,000 loss can she currently deduct against her salary and portfolio income? (Figures are illustrative only.)

1. A.$50,000 -- her outside basis of $60,000 comfortably covers the full allocated loss.Wrong. Basis is only the first of three sequential tests; the loss still has to clear the at-risk and passive-activity limitations.
2. B.$0 -- the loss has to clear basis, then at-risk, then the passive-activity test in sequence; it fails the $42,000 at-risk ceiling, and because she has no other passive income, whatever survives at-risk is suspended as passive with nothing to offset it.Correct. All three sequential tests -- basis, at-risk, passive-activity -- must be satisfied, and the absence of other passive income suspends the loss entirely.
3. C.$42,000 -- that is her at-risk amount, and at-risk is the final limitation applied to direct participation program losses.Wrong. At-risk is not the final gate; a limited partner's interest is passive by default and still needs passive income to release the loss.
4. D.$8,000 -- that is the portion disallowed by the at-risk test, implying the remaining $42,000 is currently deductible.Wrong. Surviving the at-risk test does not make a loss currently deductible; it still must clear the separate passive-activity test.

Why: Deductibility of a direct participation program loss runs through three independent, sequential gates: outside basis, then at-risk amount, then the passive-activity test. A loss that survives basis and at-risk is still passive by default for a limited partner and needs passive income to be released; with none available, nothing is currently deductible against salary or portfolio income.