opinion on bill passing for no tax on forgiven debt?

Answer 1

I'm kind of on the fence on that one. If it can be clearly substantiated that the taxpayer received no enrichment, such as if a home's value tanks and it goes into foreclosure then I may be OK with it.

Even under the current rules, if the taxpayer is insolvent then there is no tax on the forgiven debt anyway. That is very frequently the case. You are insolvent if the value of your assets is less than your total debt. That's typically the case when a homeowner is upside down on their mortgage and has no other significant assets.

However, in the case of credit card debt where the taxpayer has received tangible goods or services of a certain value and then cannot pay the bill or settles for less than the outstanding debt, I have a problem with that. The taxpayer received something of value and then paid less than what they owed for it. That's enrichment and in that case I have a problem with not taxing the forgiven debt.

The same thing applies when a homeowner who has had significant appreciation in the value of their home mortgages it to the hilt to either buy more properties, vacations, luxury cars, investments, etc. and then winds up upside down and bails on the home and lets it go to foreclosure. Those folks may be hit with both capital gains taxes (a foreclosure is just a forced sale) and tax on the forgiven debt. If they are going to get a bye on the tax, they should be forced to liquidate anything that was purchased with the proceeds form the mortgage first.

Unless this bill is written VERY carefully, there will be significant abuse, paid for by the honest taxpayers. I DO have a BIG problem with that.

Answer 2

The lender gets a write-off, the borrower gets the other side of the equation. It is still a windfall for the defaulting borrower.

Answer 3

If the actual principal is forgiven it should be taxed.

But if the amount forgiven is interest and penalties then it should be untaxed.