CHANGE IN REAL ESTATE

A client who bought an apartment complex for $1.5 million. He held it for several years, just about breaking even on a cash-flow basis and enjoying the tax benefits. Unfortunately, the neighborhood changed. The fair market value of the property fell to only $800,000 -- on a good day
Because of the decline in the neighborhood, rents also dropped. His cash flow wasn't sufficient to cover the mortgage, and he faced bank foreclosure. Seeing nothing but further price decreases, he panicked and sold.
Here's where he got killed. While he got $800,000 for the property, he owed the bank more than $1 million. He had to take out a second mortgage on his home to cover the $200,000 difference.
The pain, however, was just beginning. Because of the depreciation he had deducted, his basis in the property was only about $700,000.