The distinction between “recourse” and “non-recourse” loans

Posted on September 15, 2007. Filed under: Business, Foreclosures, NOD NOT REO, short sales |

Current info about Recourse Loans is here

If you would like the full handout “Taxation of Forclosures,Deeds in Lieu of Foreclosures, and Short Sales” by the California Association of Realtors please go to the Short Sales Downloads Page.

Make a Comment

Make a Comment: ( 10 so far )

10 Responses to “The distinction between “recourse” and “non-recourse” loans”

RSS Feed for Homes and Investments in the SF East Bay area, Plus… Comments RSS Feed

I got this comment in an email from “A.H.”:

your calculations for non-recourse loans taxable capital gain is wrong.

On a recourse loan the fair market value and the amount of canceled debt are relevent in order to determine capital gain and ordinary income. As you know on recource loans you may have both.

On non-recourse loans however the the fair mareket value is irrelevant. You may only have capital gain but not ordinary income. So only the amount of the canceled debt is taking in consideration to arrive at the capital taxable gain. (canceled debt mines adjusted basis)

OK all you CPAs out there, what do you think?
The numbers in my post are from the California Association of Realtors. I defer to experts in all tax matters.

Eric Haggin

Eric Haggin
September 24, 2007

Why doesn’t a lender’s decision to use a trustee sale result in the loan being “non-recourse”. While the loan may originally have been a resourse loan, the trustee sale choice effectively makes any deficiency uunavailble for collection. The lender has not “forgiven” any debt, it is barred by law from proceeding against the debtor. The reason for distinguishing between recourse and non-recourse in the first place is due to the lender’s inability to collect the deficiency.

Additionally, aren’t home improvement loans considered “purchase money mortgages” if the proceeds are used for capital improvements to the property? And, therefore, they too would be non-recourse loans?

JD
October 6, 2007

Hi JD,
Thanks for your comments.
NOTE: I am not a CPA- Don’t use my answer for anything other then a source of questions for a CPA or Enrolled Agent.
The home improvement loan is not used to purchase the asset so it’s not a “purchase money” loan. That type of capital improvement expense may be treated differently (added to basis)but the purchase-money thing is only at the time of purchase.
The lender may(usually will)choose a Trustee’s sale because it’s quicker and cheaper. The lender however can not pursue a deficicency judgement even on an otherwise “recource” loan. I’m not sure if the seller will still get a 1099 from the lender for the debt forgiveness. It’s usually safe to bet that the IRS makes out in the end.
Eric

Eric Haggin
October 7, 2007

Wow, this is a hot topic. I am a realtor and
a registered tax preparer. The IRS has some new
information regarding this topic on its website,
http://www.irs.gov.

Skip D
October 20, 2007

Yes, It’s a very hot topic. This article has been the most viewed on my site for over a month!
Eric

Eric Haggin
October 21, 2007

THE CANCELLATION OF DEBT RULE:

Both the IRS and California tax you for the amount of debt that is CANCELLED in any given tax year. Debt is cancelled only when a lender has given up on its right to collect the debt or they are barred by law from collecting the debt (think PURCHASE MONEY & ONE ACTION rules). HOWEVER, if the debt cancelled was a “Purchase Money” loan the debt cancelled is treated as a sale of your residence, subject to normal homeowner exclusions. This is because the loan is deemed to be non-recourse and therefore nothing has been cancelled.

mike
March 26, 2008