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Does my loan type change the taxes after a foreclosure?

Yes, it can. With a recourse loan, you are personally liable, and debt forgiven above the home's value can count as income. With a nonrecourse loan, the IRS generally treats the whole loan balance as the sale price, so there is no canceled debt income, though there may be a gain. Box 5 on your Form 1099-A or 1099-C shows which one the lender reported.

By Guillermo Serafin, broker and owner of Serve First Realty. Updated October 2026.

What do recourse and nonrecourse mean?

  • Recourse debt is debt you are personally liable for. The lender can look to you, not just the home, for what is owed.
  • Nonrecourse debt is all other debt. The lender can take the property, but you are not personally liable for the rest.

How is a foreclosure taxed with a recourse loan?

The IRS splits it into two parts.

  • The sale part. What you are treated as getting for the home is generally its fair market value, plus any cash you got from the sale. You compare that with your adjusted basis to find a gain or loss. A loss on your own home is not deductible.
  • The canceled debt part. If you owed more than the home was worth and the lender forgives the difference, that forgiven part is ordinary income unless an exception applies.

How is a foreclosure taxed with a nonrecourse loan?

The IRS treats the entire loan balance as what you got for the home, even if the home was worth less. A foreclosure on nonrecourse debt does not create canceled debt income. But because the whole balance counts as the sale price, you may have a gain if the balance was more than your adjusted basis.

What does an example look like?

IRS Publication 4681 uses this example. A home was bought for 200,000 dollars with a 185,000 dollar loan. At foreclosure, the loan balance was 180,000 dollars, the home was worth 170,000 dollars, and the adjusted basis was 175,000 dollars.

Same foreclosure, two loan types (IRS Publication 4681 example)
QuestionRecourse loanNonrecourse loan
Treated as sale price170,000 dollars, the home's value180,000 dollars, the full loan balance
Gain or loss5,000 dollar loss, not deductible5,000 dollar gain
Canceled debt incomeAny forgiven debt above the home's value. In the IRS example the lender forgave 2,000 dollars, and the owner still owed 8,000 dollars.None

A gain on your main home may be left out if you qualify for the home sale exclusion in IRS Publication 523.

Are there times nonrecourse debt still creates income?

Yes. If you keep the home and the lender lowers your loan balance in a loan modification, or gives you a discount for paying early, the IRS says that reduction is canceled debt even on a nonrecourse loan. The rule above applies when you give up the property.

How do California's rules connect to this?

California has anti-deficiency laws. They limit when a lender can come after you for the rest of the debt after certain sales.

  • Code of Civil Procedure section 580b bars deficiencies on certain purchase-money loans, the loans used to buy a home of up to four units that the buyer lives in. It can also cover some refinances made on or after January 1, 2013, but generally not cash taken out.
  • Section 580d bars a deficiency on the loan foreclosed through a trustee sale, the usual way homes are foreclosed in California.
  • Section 580e protects qualifying lender-approved short sales of homes with one to four units.

The California Franchise Tax Board says forgiven nonrecourse debt generally does not create tax from canceled debt income. But whether California's protections make your loan nonrecourse for tax purposes depends on your facts. Do not assume. Ask a tax professional, and check box 5 on your forms. See will I owe money after foreclosure?

What about a second mortgage?

A first-loan foreclosure can wipe out a second loan's lien on the home, but that does not mean the second loan's debt is canceled. It may still be collected or later forgiven, and it can be taxed differently. See our zombie second mortgage guide.

What should I do now?

  • Find your loan papers and any Form 1099-A or 1099-C. Look at box 5.
  • If the box looks wrong, ask the lender in writing to review it.
  • If you had a recourse loan, read our insolvency worksheet walkthrough.
  • Get help from a tax professional. Free help may be available through the IRS VITA program at 800-906-9887.

General information, not tax or legal advice. We are not tax professionals. Sources: IRS Publication 4681 (2025), IRS Publication 5550 (August 2021), IRS Publication 523 (2025), IRS Publication 4731-A (Rev. 10-2024), IRS Forms 1099-A and 1099-C (Rev. 4-2025), California Franchise Tax Board Mortgage Forgiveness Debt Relief page (updated 12/17/2025), and California Code of Civil Procedure sections 580b, 580d, and 580e.

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