Is a deed in lieu of foreclosure a smart move?

we live in arizona and bought 3 residential lots to build homes on (my husband is a builder). we have paid on them for 5 years (75,000/year)but can no longer do so.
the bank has offered to do a deed in lieu of foreclosure if we provide $85000 cash. we would have to borrow that money and would be in debt for a long time. we have a short sale contract on one of the lots right now so the bank has taken that into consideration.
is it a smart move? how would it affect our credit? would we be able to prove to the irs that we were legally insolvent? in other words, could we prove that our total debts are greater than the value of our assets? we owe a lot more on these lots than they are worth. we don't want to pay taxes on these properties since we have lost so much money.

thanks so much!