1099-c on a short sale in 2012 -rental that was primary

[Marty Gangler]

Hello.  I had a house in the suburban Chicago area for 5 years.  The first 3 years it was a primary residence.  Then once we decided to increase our family we bought a new house and converted the first house to a rental in 2010.  The market was horrendous then so there was no way we could sell.  After 2 years of renting we could no longer carry the house and losses mounted.  So we short sold the house (as a rental) in 2012.  We received a 1099-C in year 2015 and now have to put it on our taxes.  It's for 125k.  Do we have to pay taxes on this amount forgiven because it was a rental?  I went to a tax person and they are researching it - and scaring the bejesus out of my wife and I.  I remember being told (in 2012) that as we lived in the place for 2 of the first 5 years it would be included in the Mortgage relief act, but it's hard to find this clause anywhere.  Has anyone dealt with this situation?