If I have investment properties that are majorly underwater, how can I legally walk away from them?

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If I have investment properties that are majorly underwater, how can I legally walk away from them?

What are the tax and credit implications?

Asked on January 19, 2012 under Real Estate Law, Florida

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

There is no way to "walk away" from the investment properties without a significant impact, though if you file a chapter 13 bankruptcy, you may be able to "cram down" the principal balance on the loans to a level commensurate with their market value--which may allow you to actually manage the debts and maintain the properties; also, filing a bankruptcy can give you leverage to negotiate with the creditors, since you can then walk away from the properties in the sense that the creditor gets the property--which it probably doesnt want--but cannot sue you for any money. Therefore, you should consult with a bankruptcy attorney to explore this option; filing bankruptcy will have a significant negative impact on your credit for years, but is still often the best option, especially when investment properties are involved.

Credit implications: defaultining on debts will  hurt your credit score significantly--which is another reason to consider bankruptcy, since the impact from bankruptcy may not be that much greater.

Tax implications: if you end up taking a loss on investment properties, it should provide you a tax benefit, though sense the specific facts are so critical, you need to discuss this with a tax advisor to understand the impact.


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