Form 6198 At-Risk Rules: Qualified Nonrecourse Financing (2026)

Do you have to file Form 6198?

Most limited partners in a real estate syndication or fund will never need Form 6198, because the form only matters when part of your money is not at risk. The test in the instructions has two halves, a loss and an amount not at risk. The table applies it to the cases a K-1 investor meets (our reading of the instruction text in the last column).

The form is filed by the investor, not the fund. The Partner's Instructions say that if you have a loss from the partnership's activity and amounts in the activity for which you are not at risk, “you’ll have to complete Form 6198, At-Risk Limitations”, and that the partnership should identify on a statement any losses that are not subject to the at-risk limitations. When a fund has more than one activity for at-risk purposes it checks Box 22 and attaches a statement, and the instructions say: “Use the information in the attached statement to correctly figure your at-risk limitation.”

Two “real property” rules that get mixed up

Summaries often say that real estate has an exception to the at-risk rules. There are two rules, and they do different things.

The instructions are explicit on the dates: “The activity of holding real property is subject to the at-risk rules for property placed in service after 1986, and for an interest acquired after 1986 in an S corporation, partnership, or other pass-through entity engaged in an activity of holding real property.” So a fund interest bought in the 2020s is inside the at-risk rules. What keeps most real estate investors from being cut by the limit is the second rule, and it works debt by debt.

What counts as qualified nonrecourse financing

Section 465(b)(6)(B) and Regulation 1.465-27(b) set the tests. All must hold for the debt to be treated as at risk, and for a partner the share of the debt “shall be determined on the basis of the partner’s share of liabilities of such partnership incurred in connection with such financing (within the meaning of section 752)” (465(b)(6)(C)).

Who is a qualified person. The instructions: “A qualified person is a person who actively and regularly engages in the business of lending money (for example, a bank or savings and loan association).” It is not a person related to you (unless the person would qualify but for the relationship and the financing is commercially reasonable and on the same terms as loans to unrelated persons), not the seller of the property or a person related to the seller, and not a person who receives a fee as a result of your investment in the property. Section 465(b)(6)(D)(ii) contains the same commercially reasonable relief for related lenders.

What the regulation's own examples show. Regulation 1.465-27(b)(6) works six cases with small dollar figures. They are the closest thing to a rulebook for a fund's mortgage:

Examples 2 and 4 together show how a guarantee works. An individual liable for only part of a loan (Example 2) takes out only that part, while an individual who is a general partner and so liable for the whole loan (Example 4) takes out the entire financing. That is a reading of the regulation's examples, not a verdict on any fund: whether a particular loan passes depends on its terms, which the fund's loan documents and the sponsor's tax statement show.

Loans from the sponsor. A loan from the sponsor or an affiliate meets two separate traps. Under 465(b)(3) amounts borrowed from a person who has an interest in the activity, or from a related person, are not at risk; the instructions and Publication 925 add that this does not apply to amounts borrowed after May 3, 2004 and secured by real property used in the activity that would be qualified financing if nonrecourse. And to be qualified at all, the lender cannot be a person who “receives a fee as a result of your investment in the property”. A sponsor that charges an acquisition or asset-management fee on the deal is, on the instruction's words, outside the qualified-person definition (our reading); whether a particular affiliate loan clears both tests is for a preparer with the loan documents.

Reading K-1 Item K1: one box, two uses

Schedule K-1 (Form 1065) item K1, “Partner’s share of liabilities”, has a Beginning and an Ending column and three lines: Nonrecourse, Qualified nonrecourse financing and Recourse. The instructions give two different uses of the same numbers:

This is why a K-1 can show a large positive basis and a small amount at risk at the same time. If your fund invested through other partnerships, Item K2 is checked and the liabilities from those lower-tier partnerships are included in Item K1. If the fund has two or more activities subject to the at-risk provisions, the instructions say it should give you a statement showing your share of each type of liability for each activity.

Form 6198 line by line for a K-1 loss

Form 6198 (Rev. November 2025) has four parts: Part I (lines 1 to 5) the current-year profit or loss, Part II (lines 6 to 10b) the simplified amount at risk, Part III (lines 11 to 19b) the detailed method, and Part IV (lines 20 and 21) the deductible loss. Part II can be used only if you know your adjusted basis; Part III “may allow a larger amount at risk”.

Ledger: one $100,000 K-1 loss, three versions of the same mortgage share

The setup is ours, to isolate one variable. You are a limited partner in a fund that owns real estate. On January 1, 2026 your adjusted basis is $120,000, of which $60,000 is your share of the fund's mortgage debt. During 2026 the fund allocates you a Box 2 loss of $100,000 and distributes $5,000 to you. You contribute nothing in 2026 and have no guarantee or loan of your own. The three columns differ only in how Item K1 splits the $60,000.

Our arithmetic, in order. Line 8 is $120,000 in every case. Line 9 removes the distribution in all three and the plain nonrecourse share where there is one: $5,000 in Case 1, $20,000 plus $5,000 in Case 2, $60,000 plus $5,000 in Case 3. The result is the amount at risk of $115,000, $95,000 and $55,000. Basis alone would allow the whole $100,000 in every case, because basis after the distribution is $115,000. In Case 3 the basis is still $115,000 after the distribution while the amount at risk is $55,000, so the whole difference comes from the at-risk step.

Two cautions. First, the loss that passes this step is only a ceiling: for a limited partner with no passive income, the allowed amount then goes to Form 8582 and is suspended there (see our Form 8582 guide). Publication 925 says an item disallowed under the basis or at-risk limits “isn’t a passive activity deduction for the tax year”, which is why the order matters. Second, the ledger uses the simplified Part II, which the instructions say can be used only if you know your adjusted basis, and which Part III may beat.

What happens to the part you cannot deduct

Carryover. Section 465(a)(2) says the loss not allowed “shall be treated as a deduction allocable to such activity in the first succeeding taxable year.” For a partner the instructions say to include the prior-year amount in the current-year Part I figures. Their own example: a prior-year K-1 had a $1,500 loss in Box 1, the at-risk rules limited it to $500, so you include both the $1,000 carried and the current-year K-1 amount on line 1 of Form 6198. Publication 925 adds that if your amount at risk rises later you may deduct previously suspended losses “to the extent that the increases in your amount at risk exceed your losses in later years”, subject to the passive rules. In Case 3, a $50,000 cash contribution in 2027 with no new loss would raise the amount at risk by more than the $45,000 carried (our reading of that sentence).

Recapture. This is a separate and narrower rule. Publication 925: “If the amount you have at risk in any activity at the end of any tax year is less than zero, you must recapture at least part of your previously allowed losses.” The income is the smaller of the negative at-risk amount and prior allowed losses (for years after 1978) less earlier recapture, and under 465(e)(1)(B) the same amount is a deduction for the next year. Example, our arithmetic: you were allowed $55,000 in 2026, and in a later year a distribution leaves your amount at risk at minus $20,000. You add $20,000 to the income of the activity, the smaller of $20,000 and $55,000, and deduct $20,000 the next year. A distribution that leaves the amount at risk at zero or above triggers nothing.

Where Form 6198 sits in the chain of loss limits

Publication 925 gives the order for a partner: the adjusted basis of the partnership interest, the at-risk rules, the passive activity rules, and then the excess business loss limitation under section 461. Our other guides cover the other steps: the K-1 box guide shows where the loss arrives, the Form 8582 passive loss guide takes the next step, and the excess business loss guide the last. Interest on money you borrowed to invest has its own cap on Form 4952, and the instructions send allowed investment interest to line 4 of Form 6198. If you are weighing a fund by tax form, K-1 versus 1099-DIV explains why only some vehicles produce this problem, and the loss harvesting guide lists the forms a final-year loss touches.

We found no change to section 465 in the 2025 law. The Cornell text lists Pub. L. 115-97 of December 22, 2017 as the last amendment, and Publication 925 (2025) mentions Pub. L. 119-21 in this part only for qualified production property in its list of section 1245 property.

What a K-1 investor can do with this

• Read Item K1 before you read the loss. Write down the ending Nonrecourse, Qualified nonrecourse financing and Recourse figures. If Nonrecourse is not zero, Form 6198 is probably part of your return.
• Ask the sponsor, in writing, how each loan is classified. Which loans are with banks, whether any person (not an entity) guarantees any of them, whether anything besides the real estate is pledged, and whether any loan is from the sponsor or an affiliate.
• Keep a per-fund at-risk ledger. Basis, amount at risk, losses allowed and losses carried diverge, and the carryover belongs in Part I next year.
• Check distributions against the amount at risk. Distributions reduce it (line 9, item 4), and recapture starts only if the year-end amount is below zero.
• Give your preparer the K-1 statements. If Box 22 is checked, the statement for each activity is what you use to figure the limit.
• Do not treat a nonrecourse mortgage as a red flag by itself. For real estate it is the case the rule was written to protect, if the tests above hold.

This is analysis of public documents, not investment, legal or tax advice. Whether a particular loan is qualified nonrecourse financing, and what your amount at risk is, depends on loan documents and basis records that only you, the sponsor and your preparer can see.

FAQ

Sources, read and saved on October 23, 2026: 26 U.S.C. 465 (Cornell LII, with Notes); 26 CFR 1.465-27 (eCFR); Instructions for Form 6198 (Rev. November 2025, dated October 21, 2025) and Form 6198 (Rev. November 2025); IRS Publication 925 (2025); Instructions for Schedule K-1 (Form 1065) (2025) and Schedule K-1 (Form 1065) (2025). Amounts labelled “our arithmetic” are ours and use the assumptions stated beside them.