the debt bill was actually passed; it is called the .The Mortgage Forgiveness Debt Relief Act of 2007
The form that I linked you to was modified last month by the IRS to allow homeowners to comply with the act.
So where line 1 e is for principle residnece, you may include other debt that is not a priciple residence on anothe line. Read the instructions carefully for other debt that is non-business debt. They give an example of a car, but those items listed are examples and not inclusive. Use it for the second home.
Additionally, if any of the debt for the second home was used to "improve or extend the value of the primary residence, that portion of the debt goes on line 1 e.
You can have a degree of insolvency which caused a lien to be forclosed on. You can avoid paying taxes on forgiveness of debt to the degree of insovency. So it is possible to still have some insolvency and still retain your home at the time of the forclosure on the second home.
When i stated that you could avoid capital gains tax, it was assuming you had a forclosrue on the primary residence. Your initial question that i respondided to did not contain this bomb.....so i gave a response on primary residence, and suddenly it is your second home and now my answer has to change slightly.
You are entitled to a maximum capital gains exclusion if you both owned the home and lived in it as your primary residence for at least 2 of the past five years. The time spent in the home does not have to be continuous. So you can add up say, 1/4 yaers or half years over the course of 5 years to total 2 years, in order meet the maximum capital gains exclusion from taxes. That maximum exclusion is 250,000 of capital gain if filing a seperate or single return, and 500,000 if filing a joint return. If you lived in the home as your primary residence (yes even the second home) less than the 2 years and was required to sell it because of unforseen circumstances you can take a porportional reduced capital gains exculsion form taxes.
Unforseen circumstances are:
natural and manmade disasters
change in financial circumstances such that you can not afford the mortgage
change in job or financial circumstances such that you may not afford to pay the mortgage and still meet basic living requirements.
change in job location that meets safe harbor requirements