Walk away from investment property in CA?

[folsomfisher]

My wife and I went 50-50 on a half acre of undeveloped land with another couple (breaking rule #1 - never go into a business venture with friends) in Folsom California. We bought the property because we knew the adjoining 2.5 acres were planning to be developed and we could take advantage of that situation. Unfortuntately, with the downturn of the economy, not only did the adjoining development project fall through but the other couple both lost their jobs (and eventually split up). As a result, my wife and I are stuck paying the mortgage on the property. Also, I went into this deal before I was married, so I am listed as a 3rd owner (my wife is not on the deed).

We currently own house and have about 240K equity in it. We owe $237K on the property, and the loan is a 6% interest-only loan, turning into an adjustable in Aug 2010. At this point, we are able to make payments on both the house and property and still have money left over each month but there's a chance I could get laid off from my job so we plan for that possibility. We do receive a 1040 from the bank on the property, so we are able to deduct the interest on the loan (not sure why that is?). we spoke with our bank about refinancing the loan, but they do not do lot loans any more, and other banks want prime + 4% for the their rate for lot loans. Fortuantely we're not in as bad of situation as other people on this forum but we would still be grateful for any and all advice.

Possibilities include:
- put the property up for sale and hope for the best (I'm guessing it might sell for $140K).
- do a deed in lieu of foreclosure
- selling our house and using the equity to build on the property.
- simply letting the property go back to the bank (if so, in addition to the negative effect on our credit rating, I assume we also would take a tax hit between what the bank gets for the property and what is owed)
- refinance our house, taking out the max equity (approx 180K in the refi), applying that to the property, and then paying down the property as quickly as possible.
Thanks for any advice