What are Recourse Debt and Non-Recourse Debt?

[NPH]

What is recourse debt and what is non-recourse debt? Can someone give me the examples? Thanks in advance.

If the debt is “recourse,” a sale of the property results in a gain equal to the difference between the value of the property and its basis. A taxpayer would have cancellation-of-debt (COD) income equal to the difference between the recourse debt and the value of the property. If the debt is “nonrecourse,” the full amount of the debt is included in the sale proceeds, resulting in gain on the sale and no COD income.

[NPH]

Our company has 5 unsecured loans and 23 secured loans. Unsecured loan means non-recourse?

[sea-tax]

What is recourse debt and what is non-recourse debt? Can someone give me the examples? Thanks in advance.

If the debt is “recourse,” a sale of the property results in a gain equal to the difference between the value of the property and its basis. A taxpayer would have cancellation-of-debt (COD) income equal to the difference between the recourse debt and the value of the property. If the debt is “nonrecourse,” the full amount of the debt is included in the sale proceeds, resulting in gain on the sale and no COD income.

My understanding and I might be wrong have been known to be wrong before is:

Recourse= A loan which the lender can go after the person who took the loan out. For example if an llc gets a loan from bank and there is default then the bank can go after the members of the llc

Non-recourse= the opposite, if the loan defaults than the bank can repo the property but not go after the members.

There is also Qualified non recourse but I am not too sure about that one.

Hope that helps maybe someone else has an idea.

[WhiteOleander]

Yes that's my basic understanding too.

If you have a recourse loan and default, the lender can hold you personally responsible for any debt remaining after the repo'ed property is sold.
If you don't pay, they can file a COD for the difference.

For nonrecouse loans, only the collateral can be used to satisfy the debt. So, if you don't pay, the lender cannot come after you for the difference owed. There is no COD. Many states have laws that require all home mortgages be nonrecourse. So, if you default, the lender can only get what they can sell the property for.

[KJ Judd]

Qualified nonrecourse is similar to nonrecourse except the loan is to purchase real property (land or building) and the real property is collateral. See TTB p.7-14. It does create basis for a partner.

[JAinNC]

I thought I knew the difference ..... until I read this post.

Jeannie

[TAX]

Links to help you...

What is recourse debt and what is non-recourse debt? Can someone give me the examples? Thanks in advance.

If the debt is “recourse,” a sale of the property results in a gain equal to the difference between the value of the property and its basis. A taxpayer would have cancellation-of-debt (COD) income equal to the difference between the recourse debt and the value of the property. If the debt is “nonrecourse,” the full amount of the debt is included in the sale proceeds, resulting in gain on the sale and no COD income.

Following link may help you.

http://www.googobits.com/articles/p3-2340-income-taxes-on-the-abandonment-foreclosure-or-repossession-of-property.html

More technical

http://www.nysscpa.org/cpajournal/old/14903809.htm

[Davc]

Qualified nonrecourse is similar to nonrecourse except the loan is to purchase real property (land or building) and the real property is collateral. See TTB p.7-14. It does create basis for a partner.

Also, the property must be used in the activity. Investment property doesn't count.