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At-risk rules refer to tax regulations that limits the amount of losses an investor can claim as deductibles to the amount that he/she has at risk.
This means that if a real estate investor has $10,000 at risk should the investment totally fails, then the total amount of tax deductions that can be claimed from that particular investment cannot exceed $10,000.
For example, if the investment garners $2,500 of tax losses each year, then the investor would only be able to claim for that $2,500 as tax rebates for 4 years.
If he or she wants to claim for more tax losses in the years after, more capital injection has to be made onto the project. This increases the amount that he stands to lose. And therefore increases the limit of claimable tax losses.
The claimable limit can also be raised should the person become personally liable for the debts of the project.
When taking on more debt instead of investing more capital becomes the issue, it is best to talk to a qualified accountant as things can become more complicated and requires expert interpretation.
This is especially when third parties and non-recourse financing comes into the picture.
At risk rules had it’s coverage extended to real estate in the tax reform act of 1986, and affects property that came into service after 1986.