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CONGRESS TAXES PEOPLE WHO PAY THEIR LOANS TO GIVE A BREAK TO DEADBEATS (UPDATED AND CORRECTED)

December 19, 2007

The House of Representatives sided decisively with deadbeats against people who pay their loans yesterday. By voice vote, they passed H.R. 3648 to allow taxpayers with a net worth over $2 million to exclude up to $2 million of debt forgiveness from income tax-free.

The "pay-for"? If you have a vacation home that you move into full-time after 2007, your gain exclusion on a future sale will be reduced to reflect the amount of time after 2007 that the house wasn't your primary residence. Or, to put it another way, people who pay their loans will pay higher taxes so deadbeats don't have to.

UPDATE: The vacation home pay-for was omitted from the final bill; I apparently was looking at an earlier version. I apologize for the error.

The sad thing is, if you have negative net worth, or are in bankruptcy, debt-forgiveness is already tax free. By definition, this tax break applies only to people who have enough net worth to pay the amount covered by the tax break. This treats debtors who lost their bets on the real estate market better than, say, those who run up debts stock trading margin accounts or at the casinos.

There must have been overwhelming public support for this giveaway to pass Congress so quickly. Oh, wait...

Congress also passed an energy bill and a veterans benefits bill with minor tax provisions, but the AMT patch bill languishes. The TaxProf rounds things up.

Tags: AMT patch.debt forgiveness.tax policy.

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