Can non-recourse debt be higher than the purchase price of a house?

August 21, 2008

From:  Barret
Date:  Fri, 16 Nov 2007

In your explanation about foreclosures and short sales, I noticed the example showed the tax basis of the property was $300K and the non-recourse debt was $500K.

In California, non-recourse debt for a homeowner is purchase money debt, so the tax basis of the property would be the purchase price, and no gain would result.

Comment?

Answer

Date:  27 Nov 2007

Hello Barret,

In most cases, you are right. I made the example consistent with the example for recourse debt for consistency and contrast.

The tax basis of a replacement residence for a sale before May 7, 1997 could have a tax basis below the cost, but most of those purchases have been refinanced.

Commercial properties can also have non-recourse loans in excess of basis.

I’ll add this information to the explanation on our web page.

Thanks for pointing this out!

Good luck!
Mike Gray

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