Supplemental income doesn’t always come in the form of a second job. These days it can mean living off your home equity — literally.

For example, one reader who recently lost his mid-management position quickly tired of the 45-minute commute to a construction job that is paying him an hourly wage. He decided to cut expenses and create more money to live on by selling his home, paying off some debts, sticking the proceeds in a certificate of deposit at the bank, and renting another place.

That’s supplemental income — the hard way.

By the time the man weighs the loss of his mortgage interest tax deduction with the tax he will have to pay on the interest from his certificate of deposit, the term "supplemental income" may be a misnomer.

What’s worse is that Uncle Sam may deem the house he just sold as investment property, exposing the man to an additional capital gains tax consequence. That’s because he had lost his family home in a nasty divorce and moved into the rental property. Then, just a few months ago, he sold the rental in the same year that the family home was sold.

"I didn’t really want to sell, but I felt it was best for me now considering the circumstances," the man said. "I knew I had to pay some bills — the wolves were at the door. I’m hoping they may hire me back in the next couple of years, or I may find something else. In the meantime, the interest from the bank will help pay the rent."

The man’s situation is a piece of a larger puzzle that may not be put back together for a long time. While some economists are calling for a gradual recovery, many of the workers who have lost their jobs via massive layoffs could still be looking for work.

In addition, some move-up candidates already have spent a significant chunk of the equity in their homes by purchasing boats, cars and second homes.

We often underestimate the "equity dilution" factor because it can be countered by rapid appreciation. People who have already bought homes are sitting on an asset, but in some cases it’s not the asset it once was. Because they have taken money out to buy other things, they are not on a high platform to move up to a larger, more expensive home.

Some of the money that would go toward the downpayment of the new house has already been spent on college tuitions or lost to plunging values.

The 2010-11 housing market will probably be pushed by first-time homebuyers even though the tax credit incentives have expired. That’s because job layoffs typically hurt people who already own homes, not first-timers.

The practice of living off the equity from your home, as our reader who lost his job is doing, comes at a curious time. Many other households are trying to refinance to take advantage of the lowest interest rates in years but are having a difficult time doing so.

Still others are voluntarily "trading down" or "buying down" (or electing not to trade up) — all ways of creating supplemental income previously eaten up by housing payments.

The high-leverage attitude that comes with a booming real estate market and sure-bet double-digit appreciation seems so long ago. Thankfully, that attitude has given way to a more cautious, realistic approach to housing. Consumers need cash left over each month after their principal, interest, taxes and insurance payments.

They are buying less house than they can afford. The idea of house as a big-time investment has moved toward house as the security for simple shelter.

So, do not be embarrassed if you’ve had to sell your home just to keep going. You’re not alone. It’s not socially unacceptable to buy down — forced or not — or to rethink your housing wants and needs.

Many companies will neither enjoy the profits nor give the wage increases we’ve seen in recent years. Supplementing those wages with money saved on lower housing costs will become more common. For many homeowners, it has become a must.

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