Which type of loan will incur taxable income if forgiven, being defined as a recourse loan?

A recourse loan is a type of loan in which the lender can pursue the borrower's personal assets if the borrower defaults. If the loan is forgiven, the borrower may incur taxable income, as the forgiven amount is treated as income since the borrower is no longer liable for repayment.

Personal loans are typically unsecured loans that individuals take for various purposes, such as consolidating debt or making large purchases. If a personal loan is considered a recourse loan and is ultimately forgiven, the borrower must report the forgiven amount as taxable income on their tax return, as it is viewed by the IRS as having received a financial benefit that must be accounted for different from secured loans such as mortgages, business loans, or student loans, which may have specific provisions or exceptions under the tax code regarding forgiveness.

In contrast, while mortgages, business loans, and student loans can also be recourse loans, they often have specific treatments under the law regarding forgiveness, such as the possibility of exclusions or deductions, which may not apply as straightforwardly with personal loans. Therefore, the forgiveness of a recourse personal loan leads directly to taxable income for the borrower.