Gain or loss is the difference between your amount realized and your adjusted basis in the property. In general, an amount realized by the transferor on a foreclosure or other transfer of property is the sum of:(1) the amount of money received; (2) the FMV of any other property received; and (3) the amount of any other liabilities that the transferee (the person acquiring the property) either assumes or takes the property subject to.

Give an example involving recourse debt in which both gain and COD income results on the foreclosure.

If the face amount of the recourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis is $120,000, you have $30,000 of COD income ($200,000 debt less $170,000 FMV) and $50,000 of gain ($170,000 FMV (amount realized) less $120,000 adjusted basis).

Source: www.irs.gov