I thought the है could be dropped off the sentence if the sentence was a negative. Is this not always the case? How would I know when you can leave it out verses when it is necessary?
The है can be dropped from negative sentences if there is another verb in the sentence. In this sentence, है is the only verb so it's not dropped.
Why can the 'nahin' not be before 'buraa' ?
नहीं should always be placed adjacent to a verb. बुरा is an adjective so the only verb in this sentence is है which is why नहीं should be placed right before है.
by adjacent you mean just to the left of the verb?
It can also be to the right of verbs (except auxiliary verbs like है, रहा etc). Placing it to the right of the verb emphasises the negation. Eg: मैं सो नहीं रहा - I am NOT sleeping.
Why can I not say होता है?
होता is only used for generalizations