Final answer:
The forgiven amount in a mortgage forgiveness on a second home is considered taxable income, which means the borrower could owe taxes on this amount.
Step-by-step explanation:
When a borrower has a mortgage reduced on a second home through mortgage forgiveness, the correct answer is a) The forgiven amount is taxable income. This means that although the borrower's payments have been lowered due to a reduction in the principal amount owed, the amount of debt that has been forgiven by the lender is considered income by the IRS and could be taxable to the borrower. Tax implications may vary, and there have been temporary provisions in the past, like the Mortgage Forgiveness Debt Relief Act, that have provided relief in specific circumstances. It's essential for borrowers to consult with a tax advisor to understand the current laws applicable to their situation.