As real estate professionals, we are not permitted by state regulators to provide advice that crosses into the realm of taxes and legal practice. Yet, both of those areas are intimately intertwined with the traditional response of most real estate agents--figure out how to get out of your unfortunate financial commitment. So rather than tell you all the legal ways you should go about approaching that option, I'd like you to consider another option--renting your current townhome.
Historically, the San Jose market has not generated anywhere near a sufficient rental rate to justify property prices. But, with the recent correction in housing prices and the resultant decrease in homeownership, rental yields (capitalization rates) have spiked considerably, from around 2-4% to 6-7%. Demand for rentals is pretty strong now in San Jose, making renting a property a viable and even profitable option.
So, to make this option really viable, you'll need to locate a new property that has declined enough in value over the past 3-4 years to compensate for the loss in equity on your townhome. Then, your current townhome will support a significant portion of the mortgage payments through rental income and you will just have to make up the difference. Since you would have had to pay much more for a bigger home and a better school area, you can cover that difference from your budget, thus allowing you to afford a second home. This is effectively the same as somebody purchasing a smaller income-generating rental property as I've done many times, but you get to do it in reverse, taking advantage of the severe decline in property prices.
Yes, you will have to hang on to a property with negative equity for a while, but if long-term population trends hold, demand for housing will drive up prices in the long-run. It's not flashy, but it's sensible and responsible. Just make sure you get an agent who properly understands the numbers that drive your financial situation so you get the right property for your needs.