Senate action gives tax relief to short-sellers this year, not next

For David Foster of Chicago, it was a stunning and welcome early Christmas present for him, his wife and three young children. 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...