[quote=HLS][quote=sd_t2] a refinance at this point could trigger a very bad consequence…the refinanced balance would be a recourse loan, if the original loan used to buy the house, that is protected by the purchase money exemption and is thus nonrecourse.[/quote]
I do not belive that is correct… My understanding of current tax law, valid through Dec 31st 2012, is that refinance of any loan amount that was used to acquire and/or improve a primary residence remains exempt from becoming recourse debt…
It is true that any cash taken out over and above this amount MAY be considered taxable income (but it may not be enforced)
*Consult your tax adviser for your situation*
“Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681”
I think there is some confusion here over recourse. Recourse refers to whether the note holder can go after other assets from the borrower in case of default in a judicial foreclosure.
HLS, you are referring to whether the debt “forgiven” as a result of foreclosure is taxable or not for a personal residence. (It is not taxable whether it was the initial loan or a refinance, subject to cash out and other restrictions in the publication HLS linked)
These are two separate (but related) issues.
A refinance (even on a primary) may be a recourse loan, meaning the note holder can attempt to go after other assets. However, in California, because of the single action rule, the lender can either go through a non-judicial foreclosure or sue (judicial foreclosure). Because of the costs, time (12 months or more) and the potential for unfavorable rulings, judicial foreclosures are rare.
I would only worry about recourse if the amount the lender wants to recover is at least several hundred K and if I were a big fish with lots of obvious assets.
Edit : Warning. I am not a lawyer or accountant. The above is not advice. Before refinancing a personal residence, consult the tax laws and perhaps seek counsel, especially if you may be upside down. This stuff is complicated.
