Those who lose homes may face state tax hit: "The state-tax hit could be substantial and the rules are complex. People in mortgage trouble should consult a qualified tax professional.
Normally, when a lender forgives debt, the forgiven amount is taxed as income.
One exception is nonrecourse debt. On nonrecourse debt, if a borrower defaults, the lender can seize the collateral but can't go after the borrower's other assets. Forgiveness of a nonrecourse mortgage generally does not result in tax on canceled debt income.
A mortgage used to buy a home is usually nonrecourse. But if the borrower refinances the loan and takes cash out, or takes out a home equity loan or line of credit, that debt usually is recourse debt. Canceled recourse debt is subject to income tax.
Exceptions to the tax also apply if the borrower is bankrupt or insolvent."
"People are starting to notice that California taxes may be significant."