Short Sellers Receive Debt Relief

The Senate’s 11th-hour extension of the Mortgage Forgiveness Debt Relief Act through Dec. 31 will save Foster, who works for a nonprofit ministry group, from having to pay the IRS about $28,000 next year on $100,000 of mortgage debt canceled by his bank as part of a short sale on his condo. Before the Senate’s action, he told me he had no idea “how or where we could come up with” that sort of money.

The federal tax code treats forgiven debt as ordinary income to the borrower, taxable at regular rates. But under an exception that took effect in 2007, qualified home mortgage debt that is canceled by a lender as part of a short sale, loan modification or foreclosure is treated as non-taxable. However, that exception expired last Dec. 31 and its renewal has been in doubt all year – leaving short-sellers such as Foster unsure whether they would be facing crushing taxes in 2015.

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