For as long as I could remember, a cancelled debt came with a tax bill. If you defaulted on a loan, the discharged debt amount was treated as income and taxed at your marginal rate, i.e. simply added on top of your income and taxed. Soon after the housing crisis of 2004-5, congress passed a waiver so those who lost their homes didn’t find insult after injury, and were not taxed on their discharged debt.
The new proposed code will extend this rule until the end of 2017, presumably long enough for those in difficult economic times to get back on track.
In theory, I think this forgiveness is admirable. In reality, it creates the ongoing risk of moral hazard. Banks should use proper criteria to qualify mortgages conservatively, and borrowers should bear some responsibility to not get in over their heads, walking away scot-free is getting off a bit too easy, in my opinion.
That’s it, the last of my Government Budget 2015 series. I hope you found a few bits of code that were of interest, or better still, might benefit you.