Thus, nonrecourse debt is typically limited to 50% or 60% loan-to-value ratios,[1] so that the property itself provides "overcollateralization" of the loan.
[4] Limited, or partial recourse debt, relies on the original loan contract, where named assets are the extent to which a lender may take action.
Due to Internal Revenue Service regulations, it would be deemed a violation of the qualified retirement account status to personally guarantee any loan on real estate owned by a self-directed IRA.
[9] 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.
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 no double taxation), and simultaneously limits personal liability to the value of the investment.
A nonrecourse debt of $30 billion was issued to JPMorgan Chase by the Federal Reserve in order to purchase Bear Stearns on March 16, 2008.
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 fair market value and purchase price and disposition price.
[12] 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.
Nonrecourse debt that is in place at the time of acquisition of the property is included in basis, Crane v. Commissioner,[15] subsequent borrowing is not.