Of the three suspended-loss layers, §465 is the one with no exit: nothing in the Code releases an at-risk carryover on disposition. A gain restores capacity — under authority that was proposed in 1979 and never finalized. A loss sale can strand the carryover for good.
By Lucas Andersen — MS Finance; 20 years in asset management and institutional energy trading; builds partnership-taxation tools and basis-reconstruction workpapers.
This article is for educational purposes. It does not constitute tax, legal, or investment advice. It describes how the rules operate; it does not recommend transactions.
Key takeaways
The three suspended-loss layers resolve differently when a partnership interest is disposed of. Suspended passive losses release by statute (§469(g)(1)). Basis-limited losses under §704(d) are extinguished (Sennett v. Comm’r, 80 T.C. 825 (1983), aff’d 752 F.2d 428 (9th Cir. 1985)). At-risk carryovers under §465 are the odd one out: no Code provision releases them on disposition. The governing framework — including a regulation proposed in 1979 and never finalized (Prop. Reg. §1.465-66) — restores at-risk capacity through recognized GAIN, which is treated as income from the activity. A sale at a loss produces no gain, so the carryover can be stranded permanently. What is settled, what is merely proposed, and what practitioners commonly do are all part of the story — described here, not endorsed.
The free K-1 Basis Tracker computes basis and loss-gate mechanics for publicly traded partnerships; for private partnerships the at-risk ledger is part of a basis-reconstruction engagement.
Losses pass through the gates in a fixed order while you hold — §704(d) basis, §465 at-risk, §469 passive (Reg. §1.469-2T(d)(6)) — and each keeps its own carryforward. The full layer-by-layer settlement, including the §704(d) and §469 rows, is worked through in Sold Your LP Interest at a Loss; this article takes the §465 row the rest of the way down.
The contrast that matters: §469(g)(1) is an explicit statutory release — Congress wrote the exit. §704(d) has a judicially confirmed terminus — the losses die. §465 has neither: §465(a)(2) carries the disallowed loss to the next year, indefinitely, and the statute simply never says what happens when there is no next year. What the released §469 losses can offset once freed is covered in can released K-1 losses offset ordinary income — at-risk carryovers never reach that stage without a restoration event.
§465(a)(1) limits deductible losses to the amount you have at risk: money and adjusted basis of property contributed (§465(b)(1)), plus amounts borrowed for which you are personally liable or have pledged unrelated property (§465(b)(2)). Not at risk: amounts borrowed nonrecourse, amounts borrowed from a person with an interest in the activity (§465(b)(3)), and amounts protected against loss through guarantees or stop-loss arrangements (§465(b)(4)). The big real-estate exception: qualified nonrecourse financing counts as at-risk (§465(b)(6)), which is why the gate rarely binds for conventional real-estate LPs. Losses that clear §704(d) but exceed the at-risk amount go on Form 6198 and carry forward (§465(a)(2)).
A structural point that falls out of the arithmetic: when the ONLY non-at-risk amount is partnership-level nonrecourse debt on Item K, a loss sale cannot coexist with a stranded carryover. That debt inflates both basis (§752(a)) and, at sale, amount realized (§752(d); Tufts) — and once cumulative losses exceed your at-risk cash, basis has necessarily fallen below the debt share, so any sale produces a gain at least as large as the carryover. Genuine stranding requires non-at-risk amounts OUTSIDE the §752 ledger — most commonly a capital contribution financed with borrowing that is nonrecourse as to the partner, or protected against loss (§465(b)(4)). That is the pattern in the example below.
Settled: the carryforward itself (§465(a)(2)) and what counts as at-risk (§465(b)). Proposed only: the disposition framework. Prop. Reg. §1.465-66 — part of the 1979 proposed at-risk regulations, never finalized in over four decades — treats gain recognized on disposition as income from the activity, which restores at-risk capacity and lets carryovers absorb it. Practitioners and the Form 6198 instructions’ general mechanics commonly follow that framework, and the IRS has shown no contrary position; but a proposed regulation is not binding authority, and this page will not present it as if it were. For a LOSS disposition, even the proposed framework offers nothing: no gain, no restoration, no release. The carryover simply persists on paper against an activity that no longer exists.
An individual funds a $50,000 LP capital contribution with $30,000 of own cash and $20,000 borrowed nonrecourse as to the partner — so outside basis starts at $50,000 (§722) but only $30,000 is at risk (§465(b)(2)). The partnership itself carries no Item K debt. Operating losses of $22,000 (2022) and $16,000 (2023) all clear §704(d); the at-risk gate allows $30,000 of them and suspends $8,000 on Form 6198. In 2024 the entire interest is sold — in one scenario for $4,000, in the other for $25,000. Every figure is engine-computed and pinned as a golden-test fixture (methodology).
| Sale at $4,000 (loss) | Sale at $25,000 (gain) | |
|---|---|---|
| Outside basis before sale | $12,000 | $12,000 |
| §741 capital gain / (loss) | ($8,000) | $13,000 |
| §465 carryover into the sale | $8,000 | $8,000 |
| Freed by gain (Prop. Reg. §1.465-66 posture) | $0 | $8,000 |
| Stranded permanently | $8,000 | $0 |
| §469 pool absorbed by the passive disposition gain | $0 | $13,000 |
| §469 release, nonpassive (§469(g)(1)(A)) | $30,000 | $25,000 |
Both scenarios tie to the dollar. Loss sale: $30,000 released + $8,000 capital loss = $38,000 of deductions against a $46,000 economic decline — the missing $8,000 is exactly the stranded carryover. Gain sale: $13,000 of gain against $38,000 of deductions nets to the $25,000 economic loss, with nothing stranded. Same partnership, same losses, same ledgers — the sale price alone decides whether the §465 layer ever produces a deduction.
Assumptions, stated per the methodology: contribution-level nonrecourse financing (§465(b)(2)), no partnership-level debt, only passive activity, no §465(e) recapture events. Genericized scenario class, not a client’s facts.
No — they are different layers with different exits. The passive carryover (Form 8582) releases in full on a complete taxable disposition (§469(g)(1)); the at-risk carryover (Form 6198) has no disposition release and depends on restored at-risk capacity. A loss can even sit in both ledgers’ history: it must clear §465 before it ever reaches §469 (Reg. §1.469-2T(d)(6)). The full layer walkthrough is in Sold Your LP Interest at a Loss.
The rule operates this way: the at-risk amount increases when the partner puts more money at risk — additional cash contributions, converting nonrecourse obligations to personal liability, or income from the activity (§465(b)(1), (b)(2)). Carryovers then absorb the restored capacity in the year it appears. Whether any of those steps makes sense in a given situation is a planning question for your advisor; this page describes the mechanism, not a course of action.
There is no provision that allows it. Honestly stated, the authority posture is: §465(a)(2) carries the loss forward against future income or at-risk increases from the activity; on a loss disposition neither will ever exist; and no statute, final regulation, or ruling converts the carryover into a deduction at that point. The proposed 1979 framework addresses only the gain side. Some practitioners note the tension with the fact that the partner’s capital loss on the sale is itself limited — but noting a tension is not authority, and this page won’t pretend otherwise.
Because consumer software only prepares Form 6198 when the interview flags an at-risk limitation — typically a checkbox buried in the K-1 entry flow asking whether some investment is not at risk. Answer it wrong (or import a K-1 without it) and the software assumes everything is at risk, no 6198 is produced, and any carryover silently ceases to exist on the next year’s return. If your capital was partly financed nonrecourse or protected against loss, the 6198 history is one of the ledgers a basis reconstruction has to rebuild.
Three ledgers, one workpaper
Outside basis, the at-risk position, and the suspended-loss pools are reconstructed together — they feed each other in a fixed order. The private partnership basis reconstruction service delivers all three as workpapers your preparer can file from, everything in writing.