Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Cancellation of Debt—Basics

Recourse vs. Nonrecourse Debt (continued)

Recourse debt holds the borrower personally liable for any amount not satisfied by the surrender of secured property.

  • If a lender forecloses on property subject to a recourse debt and cancels the portion of the debt in excess of the fair market value (FMV) of the property, the canceled portion of the debt is treated as ordinary income from cancellation of indebtedness. This amount must be included in gross income unless it qualifies for an exception or exclusion.
  • In addition to this cancellation of indebtedness income, the taxpayer may realize a gain or loss on the disposition of the property; this amount is generally the difference between the taxpayer's basis in the property and the FMV of the property at the time of the foreclosure.
  Recourse Debt Nonrecourse Debt

Borrower is…

Personally liable

Not personally liable

Cancelled portion of debt is generally…

Treated as ordinary income and included in gross income (unless it qualifies as an exception or exclusion)


Gain or loss on disposition of the property

Generally determined by the difference between the FMV of the property and the adjusted cost basis