706NA

It's a zero sum game. The gross value of the real estate on the applicable schedule is its value on DoD. The recourse loan is later deducted to get to the taxable estate. Or...

The gross value of the real estate is its value on DoD less the indebtedness of the non-recourse loan and there is no deduction later.

So.... the IRS is correct. You don't get a deduction for a non-recourse loan because you already accounted for it in the gross value.

As an aside, prior to 2013, only money purchase loans were non-recourse in CA. If the owner refinanced, then the loan was no longer a money purchase loan and it became a recourse loan. CA has a boat load of refinanced debt that is recourse loans. Starting in 2013, CA amended its anti-deficiency law to include refinanced debt as non-recourse but only to the extent of the outstanding amount of the money purchase. A cash out refinance would be partially non-recourse (amount to pay off purchase debt) and partially recourse (amount borrowed in excess of purchase debt). It is not retroactive and only applies to loans executed in 2013 and later. I haven't actually read the law so I don't know if the cash-out remains non-recourse to the extent that the money is used for capital improvements. I would hope so.

$13K or $46.8K times the ratio of US Estate over Total Estate.

I thought that only pertained to purchase money mortgages, not refi. Or has that changed from years ago?

and only for your primary residence.

In this case the IRS wants to include the whole gross value of the property in the estate, as the taxable estate. They want to give no deduction in any respect for the mortgage. Their reason is that the loan is (as far as they are concerned) non-recourse, so is entitled to no consideration.

As Alan has noted, starting in 2013 refinanced loans are considered purchase-money to the extent it doesn't exceed the purchase-money refinanced loan.

In my case there was no refinance.

Not quite. It applies to any sale of real estate financed by the seller. It also applies to residential property of four units or less that was intended to be the primary residence of the buyer at the time of purchase.

Huh? The debt is a secured loan. Death doesn't wipe out the liability to pay off the debt. If the estate does not pay it, the lender can seize the property, sell it off and if the amount is less than what is owed on the nonrecourse loan... tough noogie. But... the liability is still there. A house that is under water on a recourse loan would have a negative effect on the taxable estate (Liability exceeds value). The same house with a non-recourse loan would have no effect on the taxable estate as its value would be zero. Hell, the IRS instructions for completing the estate tax return even say that.

=====================================================================If any item of real estate is subject to a mortgage for which the decedent's estate is liable, that is, if the indebtedness may be charged against other property of the estate that is not subject to that mortgage, or if the decedent was personally liable for that mortgage, you must report the full value of the property in the value column. Enter the amount of the mortgage under ?Description? on this schedule. The unpaid amount of the mortgage may be deducted on Schedule K.

If the decedent?s estate is not liable for the amount of the mortgage, report only the value of the equity of redemption (or value of the property less the indebtedness) in the value column as part of the gross estate. Do not enter any amount less than zero. Do not deduct the amount of indebtedness on Schedule K. =====================================================================

you are right. An excellent example of the need to read the statute and not rely on old and possibly outdated recollections.

The IRS agent is saying that the loan is disregarded if it's non- recourse. Period.

Apparently the guy we're dealing with doesn't know that.