Foreclosure 'Tax' Is Next Mortgage Crisis

President Bush is trying to help beleaguered homeowners, and the Federal Reserve has been easing credit to accommodate the financial markets. But this mortgage mess is a huge and growing problem that will be exacerbated by millions of adjustable-rate loans that are about to reset, resulting in higher monthly payments in the year ahead.

And unless Congress acts quickly to change tax policy, there are more surprises that will start appearing next April. If you're forced to sell your home at a loss -- or lose it through a foreclosure -- the tax consequences could be costly.

Tax laws on home sales are based on the idea that just about every home is sold at a profit. But if you sell your personal residence at a loss, the tax code offers no solace. It may even penalize you.

Homeowners can exclude as much as $250,000 (or $500,000 on joint returns) in gains on the sale of a primary residence -- after living in the home for at least two of the five years that end on the sale date.

It's not a one-time deal. You again can exclude a gain on the sale of a subsequent residence after living in it for at least two years. Gains above the caps of $250,000 or $500,000 are taxed as capital gains (current maximum rate: 15%).