The Home Affordable Modification Program is an important tool for homeowners who are experiencing financial difficulties in making their mortgage payments yet desire to keep their homes. Most would probably agree that the ideal home loan modification would include a lower monthly payment, lower interest rate, and probably most importantly, a principal reduction. However, that principal reduction could affect the homeowner when he or she later decides to sell the property. Although a principal reduction loan modification will not typically result in cancellation of debt income, it will likely reduce the homeowner’s basis in the subject property. The basis reduction will equal the amount of the principal reduction. The end result could increase the homeowner’s tax liability when the property is later sold. See IRS Publication 4681 (2012).