Do Non-Recourse Loans Provide Federal Tax Benefits?

Non recourse loans do not provide any federal tax benefits for a borrower. The loan is secured by a collateral requirement, which lowers the loans value and also charges a higher interest cost. The risk of loan default is higher with a non recourse loan in order to protect the interests of the lender.

Capital Gains Tax

If a loan default occurs, there is a possibility for a capital gain or capital loss to occur. A capital happens when the value of the loan is less than the sale proceeds received from the sale of the property. Even though the borrower does not receive this gain, they are subject to capital gains tax if the amount of the difference exceeds a certain amount for either a single or a married couple. This amount changes from year to year as set by the Internal Revenue Service (IRS).

Capital Loss Deduction

A capital loss occurs when the opposite occurs. That is the value of the loan is more than the sale proceeds received from the property’s sale. This resulting loss cannot be deducted by the borrower, like with traditional loans.