California Real Estate, recourse vs non recourse, mortgage forgiveness debt act

ceb.com: Reflections on the Mortgage Forgiveness Debt Act of 2007

The problem arises, however, when a taxpayer refinances an original purchase money mortgage and uses the "refi" proceeds for purposes other than (or in addition to) the acquisition or substantial improvement of the principal residence. Most lenders believe that any refinancing of a home mortgage removes the "purchase money mortgage" protection under California law and results in recourse liability against the borrower. Although this remains unclear, if such is the case, then debt discharged on a refinanced home mortgage would cause a California borrower to have cancellation of indebtedness income that might be excluded under the Act. Furthermore, to the extent a borrower has pulled out cash from a refinanced mortgage and used it, say, to pay off credit cards or other debts, the loan obligation is recourse under California law. But in that case, if part of the loan is discharged or forgiven by the lender, the borrower will have cancellation of indebtedness income that is not excluded under the new law because it was not used as "acquisition indebtedness." This is a trap for the unwary, and will require taxpayers and their advisors to keep accurate records of all home loan borrowings and the use of such proceeds.