266:
loan, that the debt is outright forgiven by the creditor, with no actual payment), the taxpayer would realize the $ 20,000 amount as income from the discharge of indebtedness. That $ 20,000 of forgiveness would be taxable to the taxpayer as ordinary income even though the taxpayer received no cash at the time of the discharge. The $ 35,000 excess of the fair market value over the adjusted basis ($ 80,000 less $ 45,000) would be treated as a taxable capital gain on the "sale or other disposition" of the property—again, even though the taxpayer received no cash at the time of the foreclosure.
36:
243:
If the amount realized exceeds the amount of adjusted basis, the taxpayer has realized a gain at the time of disposition. If the adjusted basis exceeds the amount realized, a loss has been incurred. The federal income tax effect of nonrecourse debt may be explained by first considering the tax effect
389:
Working Paper No. 09-10. The authors classify eleven states (Alaska, Arizona, California, Iowa, Minnesota, Montana, North
Carolina, North Dakota, Oregon, Washington, and Wisconsin) as nonrecourse. The authors also discuss the reasoning for this classification on a state-by-state basis. In several of
265:
Assuming that the creditor forecloses on the property and that the $ 20,000 excess of the debt over the property's fair market value ($ 100,000 less $ 80,000) is contractually discharged (for didactic symmetry with the nonrecourse example, let's assume, contrary to the commercial point of a recourse
269:
Assuming the same facts except that the debt is nonrecourse, the result would be quite different. The taxpayer would realize zero taxable ordinary income from the discharge of debt. Instead, the entire $ 55,000 difference between the unpaid principal of the debt and the taxpayer's adjusted basis ($
156:
and other securities-collateralized lending structures. Since most commercial real estate is owned in a partnership structure (or similar tax pass-through), nonrecourse borrowing gives the real estate owner the tax benefits of a tax-pass-through partnership structure (that is, loss pass-through and
120:
In Europe, mortgage loans secured by personal residences are usually recourse loans. Most states in the United States also permit recourse for residential mortgages, but antideficiency statutes in a minority of states require nonrecourse mortgages. Around 13 states can be classified as nonrecourse
212:
in the property is fairly complex. The tax consequences of a disposition depend on whether the taxpayer acquired the property with the nonrecourse debt already attached, or whether the taxpayer took out the nonrecourse debt after acquisition of the property, and the relative relationships between
277:
At the sale, foreclosure or other disposition, nonrecourse debt incurred as part of the financing of the acquisition, and money extracted from an investment by mortgaging out, are treated the same: both are taxable realization only at the time of the property's disposition, even if, at time of
217:
and purchase price and disposition price. Upon a sale or other disposition of property under U.S. income tax law, a taxable gain generally results where the amount realized upon the sale or other disposition of property exceeds the amount of the taxpayer's adjusted basis in that property.
248:(that is, a debt in which the property provides first security coverage, and the borrower/taxpayer is personally liable for any deficiency that may remain after the lender forecloses against the property), and then contrasting against similar facts involving nonrecourse debt, as follows:
100:, the lender can seize and sell the collateral, but if the collateral sells for less than the debt, the lender cannot seek that deficiency balance from the borrower—its recovery is limited only to the value of the collateral. Thus, nonrecourse debt is typically limited to 50% or 60%
107:
The incentives for the parties are at an intermediate position between those of a full recourse secured loan and a totally unsecured loan. While the borrower is in first loss position, the lender also assumes significant risk, so the lender must
232:
The amount of the original cost incurred by the taxpayer when the property was acquired, including the amount of any nonrecourse debt assumed by the owner/taxpayer as part of the acquisition (also known as "original
151:
Nonrecourse debt is typically used to finance commercial real estate, shipping, or other projects with high capital expenditures, long loan periods, and uncertain revenue streams. It is also commonly used for
524:, 634 F.2d 12 (1980) (a "nonrecourse mortgage debt is a debt of the property owner since he is, in reality, a quasi-obligor on the debt, notwithstanding the fact that the debt is owed by the property.");
532:, 198 F.2d 357 (2d Cir. 1952) (the excess of the amount of the debt over the adjusted basis of the property is gain, and will be treated as capital gain, subject to the rules on depreciation recapture).
221:
Generally, the amount realized is the amount of cash and other consideration received by the taxpayer. The amount of any loan forgiven or discharged is generally part of that consideration.
192:
amount. This money is true nonrecourse funding, if the case is lost, one does not owe the company funding the lawsuit anything. This is a purchase of an asset and not a loan.
278:
disposition, the property is worth less than the amount of the mortgage. Nonrecourse debt that is in place at the time of acquisition of the property is included in basis,
390:
the nonrecourse states some form of recourse is available but impractical due to lengthy and expensive judicial proceedings, jury trials, and extended redemption periods.
340:
112:
the loan with much more care than in a full recourse loan. This typically requires that the lender have significant domain expertise and financial modeling expertise.
451:
502:
132:
regulations, it would be deemed a violation of the qualified retirement account status to personally guarantee any loan on real estate owned by a
208:, the interaction among the concepts of (1) the "amount realized" upon a disposition, (2) the amount of nonrecourse debt, and (3) the amount of
591:
596:
143:(PACE) loan, used by some states to fund residential energy improvements, is an example of a loan that is nonrecourse to the borrower.
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on the "sale or other disposition" of the property—again, even though no cash is received by the taxpayer at the time of foreclosure.
386:
161:), and simultaneously limits personal liability to the value of the investment. A nonrecourse debt of $ 30 billion was issued to
205:
427:
128:
investors who choose to purchase investment real estate are able to leverage their purchase with a nonrecourse loan. Due to
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on March 16, 2008. The nonrecourse loan was issued with Bear
Stearns's less liquid assets as collateral, meaning that the
125:
414:
516:
362:
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Less the amount of depreciation (or similar) deductions allowed (or allowable) to the taxpayer on that property.
181:
129:
586:
189:
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417:, concluded that at least 10 states can be generally classified as nonrecourse for residential mortgages.
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provides nonrecourse financial products used to provide financial assistance to plaintiffs involved in a
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479:
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455:
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467:
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188:-based lawsuit like a car accident. The funds are provided to the consumer on the potential
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will absorb the loss should the value of those assets be below their collateralized value.
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288:. Subsequent borrowing proceeds reinvested in a depreciable property thereby avoid
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483:
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383:"Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States"
17:
368:
Fannie Mae, Freddie Mac, and the
Federal Role in the Secondary Mortgage Market
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Plus the costs of improvements (if any) made by the taxpayer to the property,
104:, so that the property itself provides "overcollateralization" of the loan.
401:"Comparison of State Laws on Mortgage Deficiencies and Redemption Periods"
413:
The
Connecticut Office of Legislative Research, relying on data from the
366:
96:, but for which the borrower is not personally liable. If the borrower
341:"U.S. new and existing home sales move in opposite directions in April"
382:
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as a liability, and the collateral is carried as an asset. For
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states, depending on a researcher's classification standards.
29:
261:
The taxpayer's adjusted basis in the property is $ 45,000.
200:
Nonrecourse debt is usually carried on a debtor company's
452:"Determination of amount and recognition of gain or loss"
478:
Unless the $ 20,000 qualifies as being excludable under
428:"Emerging Issues: Residential PACE Loans and Bankruptcy"
255:
The unpaid principal of the recourse debt is $ 100,000;
270:
100,000 less $ 45,000) would be treated as a taxable
258:The fair market value of the property is $ 80,000;
8:
542:Crane v. Commissioner of Internal Revenue
503:Crane v. Commissioner of Internal Revenue
554:Woodsam Associates, Inc. v. Commissioner
526:Woodsam Associates, Inc. v. Commissioner
286:Woodsam Associates, Inc. v. Commissioner
381:Ghent, Andra C. and Kudlyak, Marianna,
332:
343:. Reed Construction Data. May 24, 2011
196:Characterization in corporate finance
7:
25:
517:Estate of Levine v. Commissioner
387:Federal Reserve Bank of Richmond
206:U.S. Federal income tax purposes
34:
284:, subsequent borrowing is not.
560:, 198 F.2d 357 (2d Cir. 1952).
141:property assessed clean energy
1:
592:Taxation in the United States
228:is the sum of the following:
597:United States housing bubble
415:National Consumer Law Center
520:, 72 T.C. 780, 792 (1979),
363:Congressional Budget Office
244:of a disposition involving
43:It has been suggested that
613:
60:Proposed since April 2024.
251:As an example, suppose:
76:(sometimes hyphenated as
500:, 461 U.S. 300 (1983);
468:Discharge of liabilities
182:legal financing industry
130:Internal Revenue Service
556:, 16 T.C. 649 (1951),
528:, 16 T.C. 649 (1951),
292:and take advantage of
497:Commissioner v. Tufts
281:Crane v. Commissioner
169:in order to purchase
544:, 331 U.S. 1 (1947).
506:, 331 U.S. 1 (1947).
102:loan-to-value ratios
53:into this article. (
27:Type of secured loan
147:Commercial lending
385:(July 10, 2009).
215:fair market value
134:self-directed IRA
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66:
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18:Non-recourse debt
16:(Redirected from
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70:Nonrecourse debt
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321:Synthetic lease
311:Project finance
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175:Federal Reserve
167:Federal Reserve
159:double taxation
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88:by a pledge of
84:(debt) that is
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587:Business terms
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480:26 U.S.C.
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456:Taxalmanac.com
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403:. 29 July 2010
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210:adjusted basis
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163:JPMorgan Chase
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124:Self-directed
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371:. p. 49.
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316:Recourse debt
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436:. Retrieved
434:. 2018-02-08
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405:. Retrieved
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345:. Retrieved
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171:Bear Stearns
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92:, typically
82:secured loan
78:non-recourse
77:
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69:
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59:
44:
347:15 November
186:contingency
154:stock loans
571:Categories
484:§ 108
438:2018-07-31
190:settlement
110:underwrite
90:collateral
407:24 August
327:Footnotes
365:(2010).
300:See also
233:basis"),
98:defaults
290:Woodsam
165:by the
86:secured
80:) is a
55:Discuss
482:
51:merged
582:Loans
558:aff'd
530:aff'd
522:aff'd
294:Crane
72:or a
577:Debt
409:2013
349:2013
224:The
180:The
157:no
126:IRA
49:be
573::
454:,
430:.
296:.
139:A
136:.
486:.
458:.
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411:.
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57:)
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