10.22 Recapture of Losses Where At Risk Is Less Than Zero

To prevent manipulation of at-risk basis after a loss is claimed, there is a special recapture rule. If the amount at risk in an activity is reduced to below zero because of a distribution or a change in the status of an indebtedness from recourse to nonrecourse, income may be realized to the extent of the negative at-risk amount. The taxable amount may not exceed the amount of losses previously deducted.

The recaptured amount is not treated as income from the activity for purposes of determining whether current or suspended losses are allowable. Instead, the recaptured amount is treated as a deduction allocable to that activity in the following year. See IRS Publication 925 for further details.