If a non-recourse loan is foreclosed and the remaining balance is forgiven, how much of that loan is taxable income?

In the case of a non-recourse loan, if the loan is foreclosed and the borrower is not personally liable for the debt, the tax implications differ significantly from those related to recourse loans. Non-recourse loans are secured by the collateral itself, meaning that if the collateral is lost (such as through foreclosure), the lender cannot seek additional payment from the borrower beyond the collateral.

When a non-recourse loan is foreclosed, any cancellation of debt would typically not be considered taxable income. This is because the borrower did not realize any income from the forgiveness of the debt, given that they were never liable for the loan amount beyond the property itself. Therefore, if the remaining balance of the non-recourse loan is forgiven after foreclosure, the amount forgiven is not included in the taxable income, resulting in the taxable income from the foreclosure being $0.

This principle aligns with IRS rules regarding cancellation of debt income for non-recourse loans, as borrowers are relieved from further financial obligation without triggering income tax liability at the point of forgiveness.