At Risk Rule - Explained
What is the At-Risk Rule?
Written by Jason Gordon
Updated at September 20th, 2021
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Table of Contents
What is the At-Risk Rule?How Does the At Risk Rule Work?Academic Research on At-Risk RulesWhat is the At-Risk Rule?
The at-risk rule is a rule used in taxation to prohibit an investor from claiming or deducting more losses than have actually incurred. In the tax law, only the actual amount of risks and losses is deductible or can be claimed by an investor. The at-risk rule also limits the amount an investor can deduct from their taxable income, according to this rule, investors can only deduct the amount they invested from their taxable income.
Back to:ACCOUNTING & TAXATION
How Does the At Risk Rule Work?
Investors claim losses on a business or investment to reduce their tax liability. Door to the tendency of some investors to deduct more than they invested or the losses incurred, the at-risk rule was created. This rule made impossible for investors to claim an amount that exceeds the losses deductible. It is also contained in the tax code that investors must have risk in an investment before losses can be deducted. The at-risk rule can be found in Section 465 of the Internal Revenue Code (IRC), this rule ensures that losses claimed by investors are valid. Hence, investors cannot deduct more than they actually invested in a business. The at-risk rule also applies to individual taxpayers, this rule states that a taxpayer can only deduct amounts up to the at-risk limitations in any given tax year.
Academic Research on At-Risk Rules
- At-risk and passive activity limitations: can complexity be reduced, Koppelman, S. A. (1989). At-risk and passive activity limitations: can complexity be reduced.Tax L. Rev.,45, 97.
- S Corporations and Shareholders under theat Risk Rulesof Section 465-Revisited, Bravenec, L. L. (1982). S Corporations and Shareholders under the at Risk Rules of Section 465-Revisited.Tax Law.,36, 765.
- Time varying risk premia for real estate investment trusts: A GARCH-M model, Devaney, M. (2001). Time varying risk premia for real estate investment trusts: A GARCH-M model.The Quarterly Review of Economics and Finance,41(3), 335-346. This study employs the generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology to investigate the return generating process of real estate investment trusts (REIT). The trade-off between excess returns and the conditional variance was positive for both equity and mortgage REITs but it was significant only for the latter. Changes in interest rates and their conditional variance were found to be inversely related to REIT excess returns. The 1986 tax law had a negative impact on the excess returns to both REIT sectors but the coefficient was significant only for mortgage REITs. The GARCH-M specification was determined to be more appropriate for the mortgage REIT portfolio than for the portfolio of equity REITs.
- Limiting losses attributable to nonrecourse debt: A defense of the traditional system against the at-risk concept, Coven, G. E. (1986). Limiting losses attributable to nonrecourse debt: A defense of the traditional system against the at-risk concept.Calif. L. Rev.,74, 41.
- The Application of theAt-Risk Rulesto Limited Liability Companies, Cash, M. S. (1994). The Application of the At-Risk Rules to Limited Liability Companies.Va. Tax Rev.,14, 483.