Following up on yesterday’s post (NY Times: DOI Income Often Follows Mortgage Foreclosure):  Newsday editorializes in favor of statutory relief for homeowners who lose their homes to foreclosure and have DOI income:  Insult to Injury: Don’t Tax the Canceled Debt of Folks Who Lose Their Homes:

If any portion of the mortgage you owe is canceled or forgiven, in most circumstances the IRS will treat that canceled debt as income. The agency will then tax it and maybe even tack on interest and penalties. Say you have a $250,000 mortgage. The bank forecloses and then sells your house for $200,000, the most it can get in this shaky real estate market, and writes off the other $50,000. Uncle Sam will consider that $50,000 – money you owed and will never repay – as income for tax purposes.

People who lose their homes should be spared this mugging by the IRS. In this blooming credit crunch, some reasonable amount of forgiven debt on a mortgage for a primary residence should be allowed to go untaxed. Those two caveats – a reasonable amount and only on a primary residence – should prevent most speculators and informed, sophisticated risk takers from benefiting from the government’s largesse.

There is a certain logic to current law. A Wall Street hotshot who gets a $50,000 loan from his employer that is later forgiven has actually realized a $50,000 boost in income. That money should be taxed. There are also common-sense exceptions already in the law. If a former homeowner is bankrupt, for instance, or lost a home due to Hurricane Katrina, the IRS won’t come knocking. …  Losing your home is tough enough. The last thing anyone facing that mortifying setback needs is for the IRS to kick them while they’re down.

(Hat Tip: Linda Galler.)