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

Cancellation of Debt—Basics

Recourse vs. Nonrecourse Debt (continued)

Nonrecourse debt is satisfied by the surrender of the secured property regardless of the FMV at the time of surrender, and the borrower is not personally liable for the debt.

  • If property that is subject to nonrecourse debt is abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the circumstances are treated as a sale of the property by the taxpayer.
  • In determining the gain or loss on the disposition of the property, the balance of the nonrecourse debt at the time of the disposition of the property is included in the amount realized (generally the selling price). Since the borrower is not personally liable for the debt, the difference between the FMV of the property and the balance of the loan is not included in gross income.
  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)

Not applicable. Nonrecourse debt is satisfied by the surrender of the secured property regardless of the FMV at the time of surrender.

Gain or loss on disposition of the property is…

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

The amount realized includes the balance of the nonrecourse debt at the time of the disposition of the property. This is true even if the FMV of the property is less than the outstanding debt.