What Happens to At-Risk Carryovers When You Sell a Partnership Interest at a Loss?

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).

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.