Why does 2 equal 1?

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A friend showed me this proof:

Proof: 2 = 1

$$Let \space x= y$$

Multiply both sides by x:

$$x^2= xy$$

Subtract $y^2$ from both sides:

$$x^2-y^2= xy-y^2$$

Factor:

$$(x+y)(x-y) = y(x-y)$$

Cancel out $(x-y)$ from both sides:

$$(x+y) = y$$

Simplify (Because $x=y$):

$$y+y=y$$

$$2y = y$$

$$2 = 1$$

Where does the logic break down? Everything is done to both sides.

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You cannot cancel out the $(x-y)$. You defined $x=y$, so you end up dividing by $0$.