I short sold my home this year and was told by my Realtor that the government forgives taxes which would normally be owed by selling a property for a loss. I had heard this before and assumed it would apply to both our first and second mortgage. Of course our Realtor knew we had two mortgages.
After the sale, I read online that this law, The Mortgage Forgiveness Debt Relief Act, does not apply to second mortgages. Is this true? And if so, assuming the forgiveness of our second mortgage totaled $80,000, is this going to be treated as ordinary income on our taxes next year? If this puts us in say, a 25% tax bracket, does this mean we'll be hit with a $20,000 tax bill?
Is there anything we can do now to mitigate this situation?
Clarification: our second mortgage was used to buy the house and taken out at the same time as the first to finance 100% of the purchase price.