Recourse vs. Non-Recourse Debt: What Investors and Landowners Need to Know

When you borrow against real estate, the type of debt matters more than the rate. Recourse and non-recourse loans look similar on paper but behave very differently when something goes wrong.

Recourse debt

Recourse debt means the bank has more than just the property as security. If you default and the foreclosure sale doesn’t cover the balance, the lender can pursue your personal assets, your other property, savings, retirement accounts.

Example: You borrow $1 million against a property. You default. The bank forecloses and sells for $700,000. You’re personally on the hook for the remaining $300,000 gap.

Who uses it: Almost everyone. Traditional bank loans, mortgages from your local bank, small-business loans, lines of credit, are usually recourse.

Non-recourse debt

Non-recourse debt limits the lender’s recovery to the property only. Same scenario as above, but the bank absorbs the $300,000 loss because they can’t come after your other assets.

Non-recourse loans usually come with stricter underwriting requirements and sometimes higher rates. They’re used for institutional real estate, multifamily, and DST offerings.

Where non-recourse debt comes from

• Fannie Mae and Freddie Mac, the government-sponsored enterprises behind much of multifamily lending. They frequently provide non-recourse options on apartment complexes
• CMBS, Commercial Mortgage-Backed Securities pools
• Life insurance companies, common for net-lease and stabilized commercial real estate
• DST sponsors, non-recourse is the default in DST offerings

Balance sheet treatment

This is where DST debt gets interesting:

• Recourse loans show up as personal liabilities on your balance sheet
• Non-recourse DST debt does not appear on your personal balance sheet

But for IRS 1031 purposes, that non-recourse debt still counts toward your debt-replacement requirement. You meet the IRS rule without taking on personal liability.

Side-by-side

	Recourse	Non-Recourse
Personal liability	Yes	No
Common usage	Bank mortgages, business loans	Multifamily, DSTs, CMBS, life insurance
Borrower risk	High	Limited to invested capital
Interest rates	Often lower	Slightly higher, stricter underwriting
Balance sheet	Personal liability	Off-balance-sheet
DST applicability	No	Standard structure

Bottom line

Recourse debt is what most landowners live with: you borrow from a bank, you’re on the hook if things go wrong. Non-recourse debt is the institutional alternative, used by DSTs and large commercial real estate. For a landowner doing a 1031 exchange, non-recourse DST debt is a way to satisfy the IRS’s debt-replacement rule without putting your ranch, savings, or retirement on the line.