[quote=trying2balance]I read this and it looks like effective Sept 30 Arizona has changed its law to not allow walk-aways. So no matter what the money that we worked hard to save for our future ins going to end up in the hands of the banks. Who already have our tax money to help them weather their mistakes and keep home prices from correcting. I don’t know if I’m more depressed or angry…[/quote]

Tax consequence 1:
The sale of a rental property for less than you paid produces a capital loss for tax purposes. The general rule is that the capital loss may be offset against capital gains, which has the effect of eliminating the tax bite for the capital gains. If gains do not exist in the current year to offset against, the loss may be offset against gains in several past years and in future years. You mentioned already that you consult with accountants, who can calculate the dollar effect of the rules as applied to your set of income facts.

Tax consequence 2:
If debt is forgiven for real estate investment property, voluntarily or involuntarily, the amount of debt forgiven is treated as income, and would create some amount of income tax liability, determined by your other income tax facts. This means that money you give to the lender to “pay in full” is not a total loss. Some portion of it (had you not paid it) would have been lost to income taxes. Your total income tax picture would determine what portion. More consultation with accountants.

The profit you made from the sale of your previous house was not money that you worked hard to save. The real estate bubble giveth, and the real estate bubble taketh away.

You should sell the Tempe property and be happy. You are in good shape compared to most people.