You can't take a capital loss on a personal residence, only on a rental. The tax on the part of the debt forgiven is due to the fact that any debt is, in fact, income to you, but is not taxed as income because it must be repaid. Therefore, if it is not repaid, it is taxed as income received, as well it should be, IMO.
Let's face it, these people gambled on real estate using other peoples' money, and lost. Why should they be rewarded for their failure? We gamble in the stockmarket each day. Do we get rewarded when we have a losing trade? Will they forgive our debt if we traded on margin and lost it all? Fat chance!
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