General Instructions

Purpose of Form

Use Form 6198 to figure:

  • The profit (loss) from an at-risk activity for the current year
    (Part I).

  • The amount at risk for the current year (Part II or Part III).

  • The deductible loss for the current year (Part IV).

The at-risk rules of section 465 limit the amount of the loss you can deduct to the amount at risk.

For more details, see Pub. 925, Passive Activity and At-Risk Rules.

Who Must File

Form 6198 is filed by individuals (including filers of Schedules C, E, and F (Form 1040)), estates, trusts, and certain closely held C corporations described in section 465(a)(1)(B),
as modified by section 465(a)(3).

File Form 6198 if during the tax year you, a partnership in which you were a partner, or an S corporation in which you were a shareholder had any amounts not at risk (see Amounts Not at Risk later) invested in an at-risk activity (defined below) that incurred a loss.

You must file Form 6198 if you are engaged in an activity included in (6) under At-Risk Activities (see At-Risk Activities below) and you have borrowed amounts described in (3) under Amounts Not at Risk (see Amounts Not at Risk later).

At-Risk Activities

The at-risk limitation rules apply to losses from the following activities carried on as a trade or business or for the production of income.

  1. Holding, producing, or distributing motion picture films or video tapes.

  2. Farming as defined in
    section 464(e)(1).

  3. Leasing any section 1245 property as defined in
    section 1245(a)(3).

Certain equipment leasing activities by closely held C corporations are not subject to the at-risk rules. See sections
465(c)(4), (5), and (6).

4. Exploring for or exploiting oil and gas resources.

5. Exploring for or exploiting geothermal deposits as defined in section 613(e)(2).

6. Any other activity that is not included in (1) through (5) above.

Exception.   Holding real property placed in service before 1987 and holding an interest acquired before 1987 in a partnership, an S corporation, or other pass-through entity already engaged in an activity of holding real property before 1987 are not affected by the at-risk rules. This exception does not apply to holding mineral property.

  
A special exception to the at-risk rules applies to a qualifying business of a qualified C corporation. See Pub. 925 for details.

Amounts Not at Risk

You are not considered at risk for any of the following.

  1. Nonrecourse loans used to finance the activity, to acquire property used in the activity, or to acquire your interest in the activity (unless the nonrecourse loan is secured by your own property that is not used in the activity). However, you are considered at risk for qualified nonrecourse financing secured by real property used in the activity of holding real property (other than mineral property). See Qualified Nonrecourse Financing.

  2. Cash, property, or borrowed amounts used in the activity that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).

  3. Amounts borrowed for use in the activity from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. However, this does not apply to (a) amounts borrowed by a corporation from a person whose only interest in the activity is as a shareholder of the corporation, or (b) amounts borrowed after May 3, 2004, and secured by real property used in the activity of holding real property (other than mineral property) that, if nonrecourse, would be qualified nonrecourse financing. See Pub. 925 for definitions.

  4. Any cash or property contributed to the activity or to your interest in the activity that is:

    1. Financed through nonrecourse indebtedness or protected against loss through a guarantee, stop-loss agreement, or other similar arrangement, or

    2. Borrowed from a person who has an interest in the activity other than as a creditor or who is related under section 465(b)(3)(C) to a person (except you) having such an interest. However, this does not apply to (i) amounts borrowed by a corporation from a person whose only interest in the activity is as a shareholder of the corporation, or (ii) amounts borrowed after May 3, 2004, and secured by real property used in the activity of holding real property (other than mineral property) that, if nonrecourse, would be qualified nonrecourse financing. See Pub. 925 for definitions.

You do not have to file Form 6198 if you are engaged in an activity included in (6) under At-Risk Activities and you only have amounts borrowed before May 4, 2004, that are described in (3) under Amounts Not at Risk.

Qualified Nonrecourse Financing

Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:

  • Borrowed by you in connection with holding real property,

  • Secured by real property used in the activity,

  • Not convertible debt, and

  • Loaned or guaranteed by any federal, state, or local government, or borrowed by you from a qualified person (defined below).

See Regulations section 1.465-27 for details, including rules for partnership liabilities and disregarded entities. This section is effective for any financing incurred on or after August 4, 1998, but taxpayers can apply the section retroactively.

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).

A qualified person is not:

  • A person related to you unless the person would be a qualified person but for the relationship and the nonrecourse financing is commercially reasonable and on the same terms as loans to unrelated persons,

  • The seller of the property (or a person related to the seller), or

  • A person who receives a fee as a result of your investment in the property (or a person related to that person).

Aggregation or Separation of Activities

File one form if your activities are listed under the aggregation rules. File a separate form for each activity if your activities are listed under the separation rules.

Aggregation rules.   All section 1245 properties that are leased or held for lease and placed in service in any tax year of a partnership or an S corporation are treated as one activity. A partner in a partnership or an S corporation shareholder can aggregate and treat as a single activity all of the properties of that partnership or S corporation that are included within each of categories (1), (2), (4), and (5) under At-Risk Activities on page 1.

  

  Activities described in (6) under At-Risk Activities on page 1 that constitute a trade or business are treated as one activity if (a) the taxpayer actively participates in the management of that trade or business, or (b) the business is carried on by a partnership or an S corporation and 65% or more of the losses for the tax year are allocable to persons who actively participate in the management of the trade or business. Similar rules apply to activities described in (1) through (5) under At-Risk Activities on page 1.

  

Separation rules.   Your activity with respect to each film, video tape, section 1245 property that is leased or held for lease, farm, holding of real property, oil and gas property (as defined in section 614), or geothermal property (as defined in section 614) that is not aggregated with other activities under the above rules is treated as a separate activity.

  Each investment that is not a part of a trade or business is treated as a separate activity.

  


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