non-recourse loans. You will have a capital loss of $60,000 ($540,000 in debt minus your cost basis of $600,000.) You won't owe tax, but you won't get a deduction if this is your primary residence. The biggest hit will be to your credit rating. In most instances, if you refinance your house, the new loan is a recourse loan, says Michael Pfeifer, a real estate attorney with Pfeifer & Reynolds. However, Roger Bernhardt, a professor at Golden Gate University School of Law, says there is no California case law that definitively establishes this as fact.
recourse loans Cancellation of debt is not taxed if the loan forgiveness was intended as a gift (not likely unless the lender was a close relative), if the borrower is bankrupt or insolvent and in certain other cases.
Pretend you bought a house for $100,000. Its value goes up to $280,000. You refinance your original mortgage with a new one for $250,000. The value goes down to $200,000, you default and the bank forecloses. This will probably be treated as a recourse loan because it was not acquired to buy the house. Assuming you still owe $250,000, you will have $50,000 in cancellation of debt income and a capital gain of $100,000 ($250,000 market value minus $100, 000 cost basis.) Once again, the capital gain won't be taxed because it falls within the exclusion for primary residences.
