Discussion:Non-recourse debt

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Discussion Forum Index --> Basic Tax Questions --> Non-recourse debt


Discussion Forum Index --> Tax Questions --> Non-recourse debt

Kathyt (talk|edits) said:

24 September 2007
This may seem like a dumb question, but how do you know whether a debt is recourse or non-recourse? I have a client who received a 1099-C (2nd home was forclosed). She will have COD if it is recourse debt, and she's not insolvent. Anyway, to the point of the question, she has no loan documents (they were destroyed in a flood recently). So how do you determine if a debt is recourse or not? Do you ask to see loan documents or do you explain it to your client and go with their answer? If so how do you explain it? I don't think I'm explaining it to her in a way that she understands.

Also, let's say I somehow find out it's non-recourse, I know you have no income from COD on a non-recourse debt, but how do you show that on a tax return to avoid getting a notice from the IRS?

Bottom Line (talk|edits) said:

24 September 2007
I doubt if it is non-recourse. There's not many of those. Did she sign a guarantee? Probably. That would make it with recourse.

Kathyt (talk|edits) said:

24 September 2007
She doesn't understand what I'm trying to ask her. My question really is, how would you explain this to the client who has no documents to bring in, I asked her if she signed a guarantee and she said, "I signed the loan papers". I feel like I'm going in circles with her but she really doesn't understand my question so I thought maybe I'm not explaining it in a way that she understands. I originally explained it like this, "Were you personally liable for the note, could they come after you for the balance after they took the house back?" and she said, "Well after they took the house back I wasn't liable anymore." Well I know that she didn't have to pay it back, hence the 1099-C but that didn't really answer my question. So maybe I'm asking the question wrong?? Any suggestions?

Bottom Line (talk|edits) said:

28 September 2007
Ask her to get a copy of the docs from the lender.

Ksnoopytax (talk|edits) said:

28 September 2007
The IRS has recently put out some helpful guidance for taxpayers who have lost their home through forclosure.

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Quoting within the article

"Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below."

It sounds like she was non-recourse but I would get a copy of the loan documents to review.

Riley2 (talk|edits) said:

1 October 2007
This is a matter of state law. I believe that most residential real estate loans in Louisiana are full recourse. This is fairly easy to check. Ask yourself if your state allows deficiency judgments on residential mortgage foreclosures. If the answer is yes, then the loan is full recourse.

KatieJ (talk|edits) said:

1 October 2007
In California, most purchase-money mortgages on personal residential property are nonrecourse under state law. When you refinance, generally you convert from nonrecourse to recourse.

The loan documents (which as others suggest, you should have her get from the lender) may or may not make this clear, since state law may govern. If they don't make it clear, you might need to ask a lawyer or a local real estate or mortgage broker.

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