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At-Risk Rules and Transferable Credits: What Buyers Do and Do Not Have to Test
Quick answer
The at-risk rules do not usually stop a buyer from using a purchased credit. Section 465 limits losses, not credits, and the §49 credit-base reduction for nonrecourse financing is computed by the seller that owns the project. Buyers still diligence the seller's financing because changes can trigger recapture, and §469 still applies to individuals.
The at-risk rules are often mentioned alongside the passive activity rules. For a buyer of a transferable credit the picture is simpler than people expect, but there are two parts to keep apart.
§465: losses, not credits
§465 limits losses from an activity to the amount the taxpayer is at risk, and applies to individuals and closely held C corporations (§465(a)(1)). A buyer of a credit receives no loss from the project, so §465 does not directly test the purchased credit.
§49: the credit base for investment credits
§49 reduces the basis on which certain investment credits are computed when the owner is financed with "nonqualified nonrecourse financing." That calculation sits with the seller who owns the property. The final regulations apply §49 to the eligible taxpayer, not to the transferee (§1.6418-2(d)(2) and (f)(3)(i)).
Partnerships and S corporations
When the seller is a partnership or S corporation, the regulations say a change after the close of the placed-in-service year in a partner's or shareholder's nonqualified nonrecourse financing is disregarded for §6418. The entity does not have to notify the buyer, the change does not cause recapture to which the buyer is liable, and the partner or shareholder applies §49 at their own level (§1.6418-3(a)(6)(ii)).
What buyers should still do
- Ask the seller whether the credit base was reduced for nonqualified nonrecourse financing, and require a representation.
- Confirm the credit amount in the registration and calculation reflects that reduction.
- Include at-risk and financing facts in the due diligence file.
- Remember recapture under §50(a) can still apply, and the buyer bears its proportionate share (recapture and insurance).
The passive rules are separate
An individual buyer still needs to clear §469 before at-risk questions matter.
Who tests what
| Rule | Applies to | Buyer's role |
|---|---|---|
| §49 at-risk (credit base) | Seller owning investment credit property | Ask for a representation; no recomputation by the buyer |
| §465 at-risk (losses) | Individuals and closely held C corporations with losses from an activity | None for the purchased credit itself |
| §469 passive activity | Individuals, trusts, closely held and personal service corporations | Applies to the purchased credit (details) |
Why partnership sellers get extra attention
When a project partnership sells, its partners may have different financing. The regulation's design keeps the buyer out of partner-level at-risk changes after the placed-in-service year, but the diligence file should still record how the credit base was computed.
Frequently asked questions
Do I need to test at-risk amounts if I buy a credit?
The final regulations apply the §49 computation to the seller; the buyer relies on the credit amount transferred and the diligence record. Ask your CPA to confirm for your facts.
Can a later change in financing cause me to recapture?
For partnership and S corporation sellers, the regulations disregard certain later changes for the buyer under §6418. Other recapture events can still arise under §50(a).
Do the passive activity rules still apply if the at-risk rules do not?
Yes. An individual's purchased credit is generally a passive activity credit under §469, so it is still limited to tax attributable to net passive income.
- 26 U.S.C. §465, Deductions limited to amount at risk (Cornell LII)
- 26 U.S.C. §49, At-risk rules (Cornell LII)
- 26 CFR §1.6418-2, Rules for making transfer elections
- 26 CFR §1.6418-3, Rules applicable to partnerships and S corporations
- 26 CFR §1.6418-5, Rules for transferee taxpayers and recapture
- 26 U.S.C. §50, Other special rules, recapture (Cornell LII)
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