Subprime Lending Woes

I read an article entitled "Subprime Lending Woes: How Declining Home Prices Can Have Tax Implications for Unlucky Owners" that was written by Bill Bischoff a couple of days ago. Here is the opening sentenece which should grab most reader's attention...

Current subprime mortgage lending woes, combined with lower home prices in many markets, can have negative implications for taxpayers who are forced to sell their personal residence or if their lenders foreclose.

He also gives us some easy-to-follow examples...

Example 1: Let's say you paid $190,000 for your personal residence, which you could currently sell for a net of $250,000. However, the first and second mortgages against the property total $280,000. If you sell, you'll have a tax gain of $60,000. Why? Because the net sale price exceeds the property's tax basis by that amount ($250,000 sale price minus $190,000 basis equals $60,000 gain).

Will the IRS cut you any slack since you're $30,000 in the red on the deal ($280,000 of debt compared to $250,000 sale price)? Unfortunately, the answer is no. The sad truth is you can have a tax gain without actually having any cash to show for it. Reason: Your mortgage debt doesn't affect your gain or loss calculation.

Click here for the whole article to see how you might be affected come tax time...