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In California, mortgage debt is nonrecourse. This means that the bank cannot come after your personal assets to repay this loan.
Hi Jacy - yes, I know the bank can't come after me, but I'm wondering if this changes the way my basis is calculate - because in this scenario I am basically selling it for what I paid for it 8 years ago.
Let me clarify. This applies to loans made to purchase owner-occupied residences. Since you refinanced, you will have to check with your lender on whether the loan is recourse or non-recourse.
If the bank forgives the remaining loan balance, you will receive a 1099-C for the amount forgiven. Cancellation of debt income is taxable unless specific conditions are met. There is an exclusion for acquisition debt on your principal residence. Acquisition debt would include any additional debt you incurred whose proceeds were used to improve the property.
Since you asked, if this property was not your personal residence, the income from cancellation of debt would only be exclude if the debt is discharged in bankruptcy or to the extent you are insolvent immediately before the discharge.
I hope this has been helpful to you.
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