> In the example of someone
> who bought a $300k no-money-down house in Merced two years ago and sees
> a 50% haircut today, the impact of walking away is not just a huge ding
> on your credit report, but also a $30-50k tax bill
Not so fast. After seven years, your credit report gets wiped clean, so no worries there. As for taxable income, it depends on how much equity you put into the house, how long you lived there, and other details. The IRS explains:
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
"The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income."
Finally, owing 30K and paying that off after five years might still better than paying for 300K on a property only worth 150K.
-- DRR