What Is Nonrecourse Debt in the IRS Rules?

Understanding nonrecourse debt will reduce your confusion at tax time.

Nonrecourse debt (a secured loan) and recourse debt (an unsecured loan) are two types of debt frequently referred to in Internal Revenue Service tax law. Understanding the treatment of nonrecourse loans is key to understanding how you should include the loan on your tax return.

Definition

Nonrecourse debt is debt secured by collateral, for which the borrower is not personally liable. If the borrower defaults on the loan, the lender can take the collateral used to secure the loan, but cannot take any additional property.

Significance

Nonrecourse debt affects the way tax law treats defaulted loans, especially repossessions and foreclosures. In these situations, taxpayers are normally mailed a 1099-A or 1099-C by the lender to show the amount of the debt that was either abandoned or canceled.

Taxpayers use the figures listed on their 1099-As or 1099-Cs to figure their gains or losses on their tax returns.

Considerations

In most instances, if you receive a 1099-C for a canceled debt, that forgiven debt must be included as income on your tax return. Unless the debt is business-related, you should include it as "Other Income."

References

• Internal Revenue Service: Publication 17
• Internal Revenue Service: Foreclosures and Repossessions