A foreclosure is a legal procedure by which mortgaged real estate property is sold by the lender in full or partial satisfaction of a mortgage debt. A short sale is a sale of mortgaged real estate property in which the proceeds from selling the property will fall short of the total balance owed by the borrower. The borrower and the lender generally enter into a short sale agreement. A deed in lieu of foreclosure is when a borrower returns mortgaged property back to the lender in full satisfaction of the mortgaged outstanding debt balance upon an agreement with the lender. An abandonment is treated as an exchange of property when the owner gives up possession and use of the property voluntarily and permanently to the lender, with the intention of ending his or her ownership and does not pass it on to anyone else. An abandonment may lead to foreclosure proceedings in order for the lender to obtain legal possession of the property.
Property secured by recourse debt
Property secured by recourse debt is not a sale of the property until the actual foreclosure sale occurs; whereas property that is secured by nonrecourse debt is considered a sale upon the foreclosure or an abandonment that is acknowledged by the lender. Throughout the presentation, I will use the term foreclosure, which will also represent short sales, deed in lieu of foreclosures, and abandonments where nonrecourse debts secured the property. These transactions are all considered sales of real property for federal tax purposes. The type of disposition does not change how the gain or loss is determined. Further, cancellation of debt income is determined by the type of loan that secures the property, and I will discuss the type of loan shortly