In the case of a recourse personal loan, how much is taxable if $20,000 is forgiven after a $2,000 balance?

In the context of a recourse personal loan, the tax implications of loan forgiveness can be understood by evaluating the amount forgiven relative to any remaining balance owed. A recourse loan allows the lender to pursue the borrower for the remaining balance after foreclosure or default, meaning the borrower is personally liable.

In this scenario, the total loan amount was $20,000, and there was a remaining balance of $2,000 when the loan was forgiven. The key here is that the amount of the loan that is forgiven, which is $20,000, is considered income. However, because the borrower has a remaining balance of $2,000, it is this amount that they are still liable for. In essence, the tax liability is based on the amount of debt that has been discharged minus any amount that the borrower remains personally liable for.

Therefore, since the loan forgiveness amounts to $20,000 and the borrower is still liable for the $2,000, the taxable amount becomes $20,000 (amount forgiven) minus $2,000 (remaining balance), resulting in a taxable income of $18,000.

As such, the acceptable taxable income from the loan forgiveness in this case is indeed $18,000, correcting any