Recourse vs. Nonrecourse Debt
Debt for which a borrower is personally liable is referred to as recourse debt. All other debt is referred to as nonrecourse debt. Whether a debt is recourse or nonrecourse may vary from state to state, depending on state law.
If a lender cancels a debt and issues Form 1099-C, the lender will indicate on the form in box 5 if the borrower was personally liable (recourse) for repayment of the debt. The tax impact depends on the type of debt - recourse or nonrecourse.
If property securing the debt was foreclosed on or abandoned, the taxpayer may need to report the disposition (sale) on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses. This is covered in detail in this course.
Generally, if the taxpayer abandons property that secures debt for which the taxpayer is personally liable, the taxpayer does not have gain or loss until the later foreclosure is completed.
If the taxpayer abandons property that secures debt for which the taxpayer is not personally liable, the abandonment is treated as a sale or exchange. For more information on abandonments see Publication 4681.