Nonrecourse debt or nonrecourse loan is a secured loan (debt) secured by collateral guarantee, usually a real property, but for which the borrower is not personally liable. If the borrower fails, the lender may confiscate and sell the collateral, but if the collateral is sold for less than the debt, the lender can not seek the balance of deficiencies of the borrower - his recovery is limited to the value of the collateral. Thus, nonrecourse debt is usually limited to 50% or 60% loan-to-value ratio, so the property itself provides "overcollateralization" of the loan.
Incentives for the parties are in the middle position between a full loan and an unsecured loan. While the borrower is in the first loss position, the lender also assumes a significant risk, so the lender must bear the loan with much more care than in a full recourse loan. This usually requires the lender to have significant domain expertise and financial modeling skills.
Video Nonrecourse debt
Consumer finance
In Europe, mortgage loans secured by private residences are usually an alternative loan. Most states in the United States also grant permission for residential mortgages, but anticrophy laws in some countries require nonrecourse mortgages. Around 13 states can be classified as nonrecourse countries, depending on the classification standards of the researcher.
Independent IRA investors who choose to purchase real estate investments can utilize their purchase with nonrecourse loans. Because of the rules of the Internal Revenue Service, it will be considered a breach of eligible pension account status to personally guarantee any lending to real estate owned by self-directed IRAs.
Maps Nonrecourse debt
Commercial loans
Nonrecourse debt is typically used to finance commercial real estate, shipping, or other projects with high capital expenditures, long loan periods, and uncertain income streams. This is also commonly used for stock loans and other secured collateral loan structures. Since most commercial real estate is held in a partnership structure (or similar taxes), nonresidential loans provide real estate owners the tax benefits of a tax-pass-through partnership structure (ie, pass-through losses and no double taxation), and simultaneously limiting personal responsibility to the value of investments. A $ 30 billion nonrecourse debt was issued to JPMorgan Chase by the Federal Reserve to purchase Bear Stearns on March 16, 2008. Nonrecourse loans are issued with the less liquid assets of Bear Stearns as collateral, meaning that the Federal Reserve will absorb losses if the value of those assets is below guaranteed value.
The legal finance industry provides nonrecourse financial products that are used to provide financial assistance to plaintiffs involved in contingent-based litigations such as car accidents. The funds are given to the consumer on the amount of potential settlement. This money is properly funded nonrecourse, if the case is lost, someone does not owe the company to fund any lawsuit. This is an asset purchase and not a loan.
Characterization in corporate finance
Nonrecourse debt is usually done on the balance sheet of the debtor company as a liability, and the collateral is done as an asset. For Federal income tax purposes, the interaction between concepts (1) "quantities realized" in the disposition, (2) the amount of nonrecourse debt, and (3) the amount of the adjusted base in the property is quite complex. The tax consequences of the disposition depend on whether the taxpayer acquires the property with the nonrecourse debt already installed, or whether the taxpayer takes nonrecourse debt after the acquisition of the property, and the relative relation between fair market value and purchase price and disposition price. After the sale or disposition of other property under US income tax law, the taxable profit generally generates an realized amount on the sale or disposition of other property exceeding the amount of taxpayer adjustment basis in the property.
Generally, the conscious amount is the amount of cash and other considerations received by the taxpayer. The amount of any loan pardoned or released is usually part of that consideration.
The adjusted base is the sum of the following:
- The original amount of costs incurred by the taxpayer when the property was acquired, including the amount of nonrecourse debt assumed by the taxpayer/owner as part of the acquisition (also known as the "original basis"),
- Plus the cost of repairs (if any) made by the taxpayer to the property,
- Reduce the amount of depreciation (or similar) deductions allowed (or permitted) to taxpayers on the property.
If the realized amount exceeds the adjusted base amount, the taxpayer has realized the gain at the time of disposition. If the adjusted base exceeds the realized amount, a loss has occurred. The federal income tax effect of nonrecourse debt can be explained by first considering the tax effects of dispositions involving recourse liabilities (ie, debt in which the property provides the first security protection, and the borrower/taxpayer is personally liable for any deficiencies that may remain after the creditor hides the property), and then compares it to a similar fact involving nonrecourse debt, as follows:
For example, suppose:
- The unpaid debts of the recourse debt are $ 100,000;
- The fair value of the property market is $ 80,000;
- The taxpayer's adjustment basis on property is $ 45,000.
Assuming that the creditor is covering up the property and that the excess $ 20,000 of the debt on the fair market value of the property ($ 100,000 less $ 80,000) is contractually disposed (for didactic symmetry with nonrecourse samples, let's assume, contrary to the commercial point of a road) loan, that the debt is actually forgiven by the creditor, without actual payments), the taxpayer will realize the sum of $ 20,000 as income from the release of the debt. The $ 20,000 forgiveness will be taxed to the taxpayer as regular income even though the taxpayer does not receive cash upon discharge. The excess $ 35,000 of fair market value on an adjusted basis ($ 80,000 less $ 45,000) will be treated as a taxable capital gain on the "sale or other disposition" of the property - again, even though the taxpayer did not receive money at the time from foreclosure.
Assuming the same fact, except that the debt is unknown, the result will be very different. Taxpayers will realize there is no taxable income from debt repayment. Conversely, the entire difference of $ 55,000 between the principal of unpaid debt and the taxpayer's adjustment basis ($ 100,000 less $ 45,000) would be treated as a taxable capital gain on the "sale or other disposition" of the property - again, though no cash is received by the taxpayer at the time of foreclosure.
On sale, foreclosures or other dispositions, nonrecourse debt incurred as part of acquisition financing, and money taken from investment by mortgaging, are treated equally: both are taxable realizations only when property property, even if, at the time of disposition, less than the amount of the mortgage. The nonrecourse debt available at the time of acquisition of the property is included in the basis, Crane v. Commissioner , the next loan is not. Woodsam Associates, Inc. v. Commissioner . Subsequent loans will be reinvested in the depreciated property to avoid Woodsam and utilize Crane .
See also
- Mortgage loan
- Project financing
- Debt debt
- Synthetic rentals
Footnote
Source of the article : Wikipedia
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