Recourse vs. Non-Recourse vs. Qualified Non-Recourse Debt in Partnership Real Estate

Thanks for that explanation, that makes a lot more sense now. So with our situation, we'd need to look at the specific loan documents to determine if it's truly recourse or if it has those "carve-out" provisions you mentioned. What exactly qualifies as a "bad boy guarantee"? Is that just a cute term for the exceptions, or are there specific things that fall under this category?

Bad boy" guarantees is really just industry slang for those carve-out provisions.'They re designed to protect lenders from borrower misbehavior, not from normal market risks. Common bad boy acts include: transferring the property without lender approval, filing a frivolous bankruptcy to delay foreclosure, committing (waste deliberately damaging the)property , misapplying insurance proceeds or security deposits, or committing fraud in loan documents. Essentially, things within your control that harm the'lender s position. Many modern loans start as non-recourse but convert to full recourse if these bad acts occur. So you could have personal liability, but only if someone does something they'shouldn t. The specific terms vary widely between lenders, so that loan document review iscrucial.

How does this actually work? Do you just upload documents and it somehow knows what parts matter? Seems like it would need to understand some pretty complex legal language.

I'm skeptical that software could accurately interpret complex loan docs. Wouldn't a CPA or tax attorney be better? These classifications have massive tax implications especially if you're dealing with big loan amounts.

You upload the documents and it uses AI to analyze them and extract the key provisions. It highlights the specific clauses that determine recourse vs. non-recourse status and explains them in plain English. It even identifies conflicts between different documents, which was crucial for us since our loan agreement and partnership agreement had some contradictory language. The interface lets you ask follow-up questions about specific sections if you don't understand something. It's not meant to replace professional advice entirely, but it helps you get informed before talking to your CPA. In our case, it found provisions our CPA had overlooked, which actually saved us money when we discussed it with him.

Wait, this actually works? I thought it was impossible to get through to the IRS these days. What does Claimyr do that's different from just calling directly?

This seems like a scam. If it was that easy to get through to the IRS, everyone would do it. I've tried calling dozens of times over the past few months and always get disconnected. No way some service can magically get you through.

The service basically waits on hold for you and calls you back when an actual IRS agent picks up. They have some system that navigates the IRS phone tree and stays on hold so you don't have to. When I used it, I got a call back about 2 hours later with an actual IRS person on the line ready to help. They don't have any special "in" with the IRS - they're just handling the frustrating hold time for you. It's especially helpful if you've been trying at peak times when the wait can be 2+ hours and you keep getting disconnected. Check out that YouTube video I linked - it shows exactly how it works.

How would this work in an LLC that's taxed as a partnership? If the LLC is the borrower but one member signed a personal guarantee, does that change the classification for everyone or just that member?

For an LLC taxed as a partnership, the classification can differ by member. If only one member signed a personal guarantee, then the debt would generally be recourse to that member and non-recourse to the others. This creates what tax professionals call a "split liability" situation. The member with the guarantee would include that debt in their basis calculations differently than the non-guaranteeing members. This often comes into play when allocating losses, as the at-risk rules limit a partner's ability to claim losses to the amount they have at risk. So in your example, the member who signed the guarantee would have different basis and at-risk amounts than the others, potentially allowing them to use losses that other members might have to suspend until future years.

The TCJA didn't change the recourse/non-recourse classifications themselves, but it did add Section 163(j) which limits business interest expense deductions generally to 30% of adjusted taxable income. This applies regardless of whether the debt is recourse or non-recourse. What's important though is that real estate businesses can elect out of this limitation, but then must use longer depreciation periods (ADS). So while the classification of the debt didn't change, the tax consequences of business debt in general were affected.

This is really helpful, thanks for sharing your experience! I'm curious - when you had your attorney review the loan documents, did they find anything surprising that you hadn't expected? I'm wondering if there are common provisions that people overlook when they're trying to figure out their liability. Like, are there standard clauses that might make debt recourse even when it seems like it should be non-recourse? Also, did the attorney review affect how you reported the debt on your partnership tax returns? I'm trying to figure out if this is something that needs to be sorted out before we file or if it's more of a "nice to know" situation.

Yes, my attorney found several things that surprised me! The biggest one was a provision buried in the loan documents that made the debt recourse if we ever had a change in ownership above 25% without lender approval - something we almost triggered when one partner wanted to sell their stake. There was also language about "key person" requirements where the debt would become fully recourse if certain partners left the partnership. These weren't called out as "guarantees" but had the same effect. The attorney review definitely affected our tax filings. We had been treating the debt as non-recourse, but with those provisions, it needed to be classified as recourse debt for tax purposes. This changed our basis calculations and affected how we could allocate losses among partners. I'd say get this sorted before you file - the IRS can challenge debt classifications years later, and if you're wrong, you could face penalties plus interest on any additional tax owed. It's definitely not just a "nice to know" situation when you're dealing with substantial loan amounts.

This is exactly the kind of detail that makes these loan structures so tricky! The springing guarantee provision you mentioned is something I hadn't heard of before, but it makes sense from the lender's perspective - they want to ensure they have recourse if the investment starts performing poorly, even before an actual default. This seems like it would create a really challenging situation for partnership cash flow planning. How do you even budget for maintaining those coverage ratios when rental markets can be unpredictable? And does this type of provision typically apply to all partners equally, or can it vary based on ownership percentages or who signed what documents? I'm wondering if this is becoming more common in commercial real estate loans, especially given how much property values and rental income have fluctuated in recent years. It sounds like lenders are getting more sophisticated about protecting themselves from market risks while still technically offering "non-recourse" products.

Great questions! Regarding state partnership laws, they can definitely impact liability, but for federal tax purposes, the IRS generally looks at the economic substance of the debt arrangement rather than just state law classifications. However, state law can influence how guarantees are interpreted and enforced, which then affects the federal tax classification. On attorney costs, I've seen reviews range from $1,500-$5,000 depending on complexity and the attorney's hourly rate. For a straightforward commercial loan review, expect closer to the lower end. Some attorneys will give you a flat fee quote upfront if you provide the documents in advance. I haven't personally encountered the springing guarantee provision, but it sounds like a nightmare for cash flow planning. You might want to ask your attorney specifically about covenant requirements and whether there are any cure periods if ratios fall below minimums. Some loans give you 30-60 days to remedy covenant breaches before liability kicks in. Also consider asking about modification options - sometimes lenders will adjust covenant requirements if you can demonstrate the breach was due to temporary market conditions rather than poor management.

This is such an important point about the K-1 implications! I'm relatively new to partnership taxation, and this thread has been eye-opening about how complex these debt classifications really are. Your point about different partners having different basis and at-risk amounts even with the same underlying debt is something I hadn't considered. Does this mean that when the partnership allocates losses on the K-1s, some partners might have to suspend their losses while others can use them immediately? I'm also curious about your comment regarding annual reviews of debt status - are there specific events or changes that typically trigger a reclassification? It sounds like this isn't a "set it and forget it" situation, which is honestly a bit overwhelming as someone just getting into real estate partnerships. The idea that our tax treatment could change year to year based on loan provisions or partnership agreement modifications is something I definitely need to discuss with our tax preparer. Thanks for sharing your experience - it's clear I have a lot more research to do before I fully understand our situation!