First, it's not what the money was spent on, that determines the primary residence piece (of which there are two parts (1) ownership and (2) use) It is whether or not the loan was secured by the primary residence
Put it this way, Is the house the collateral for the loan?
Regarding your questions about investment property and primary residence being treated the same" ... No, they are not
If the property securing the loan IS you primary residence (meaning that you own the property (ownership) and that you lived in the property for any 24 months of the last 5 years (use) then you do not have to be insolvent, you'll simply complete a couple of lines on the 982 form to saying that the home securing the loan(s) IS indeed your primary residence and you're done ... But if the property securing the loan is an investment property, then you must show and document insolvency
For debt forgiveness on a loan secured by any other asset besides you primary residence, you WILL have to show insolvency
I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)
Please let me know if you have any questions as all ...
Just to recap, you concern about this being primary mortgage indebtedness where you said ... " I had a second mortgage forgiven on the primary residence in 2010. I may not qualify under for the tax exemption based on qualified principal residence indebtedness because the amount was borrowed through refinancing after the 2 family house had been rehabbed, and I cannot prove that the money received was spent on the improvement of the house." ... is not a problem. Again, what this whole thing turns on is whether the debt is SECURED by the residence that you owned and lived in for 2 out of the last five years (how the money was spent is irrelevant ... Its what is the mortgage ON said differently, what property was pledged to get the mortgage
Let me know if you have any furthr questions at all
Also, you should know these other two factors that MAY be important (IFyou secured the indebtedness with something other than your primary residence):
(C) Principal residence exclusion takes precedence over insolvency exclusion unless elected otherwise.
--Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).
(3) Insolvency exclusion limited to amount of insolvency.
--In the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent.
26 U.S.C.A. § 108 (West)
And remember tat the Law itself always take precedence over what someone on the front lines at IRS may tell you.
However, if you have any trouble at all you can use this, from the IRS web site regarding the Act: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-
Here's what they say (in the first statement on the page):
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Hope this helps