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Article of the Month for February 2005 Printer friendly version

Avoiding An IRS Redemption

by Ward Hanigan

The central idea to preventing an IRS redemption of your foreclosure bargain bought at auction is to avoid their attention and at the same time make it difficult for their Special Procedures section to interest anyone else in becoming their "guaranteed bidder" on your property-a prerequisite their regulations dictate before they can exercise their redemption powers [IRC 7425(d)].

IRS is so woefully understaffed that it's quite common for them to lose track of the many foreclosed properties that they have a 120 day right to redeem. That is unless you, in your eagerness to start on your rehabbing, approach them and wave a red flag in their face about your particular deal with your request for a waiver of the time. The biggest favor you can do for yourself is to just sit tight and wait it out.

You see, even though the foreclosing trustee sends IRS a copy of the Notice of Trustee's Sale on your deal prior to the originally scheduled sale date, it's just one of hundreds of such notices "raining down" on them from several different county areas, all at the same time. And IRS has to actively keep up with the final consequences of all those pending sales, struggling to follow up on the ones that finally went to sale and were overbid-but not spin their wheels on the overencumbered junk that wasn't even bid on. It is an immense task that their Special Procedures section can't hope to keep up with.

In case they spot your deal during the 120 days you're still O.K. as long as they fail to interest anyone in putting up their mandatory 20% (of their minimum opening bid) cash deposit. IRS will send a notice about the property and their starting bid to anyone on their list of "prospective purchasers", hoping to get one of them excited enough to put up that deposit. So don't do anything during the 120 days that would encourage someone to put it up!

For self-protection get on their prospective purchaser list under some pseudonym. Then you'll know if they're sending out a flyer on your foreclosure buy, and more importantly, how much their minimum bid is. Thus, if you're of mind to buy them off and not wait the 120 days you'll know the least they'll accept. It's the difference between your redemption refund and their minimum bid.

Also, work on the theory that nobody is going to buy a "pig in a poke". So if the property is vacant lock it up tighter than a drum and make sure that every single window, patio door, etc. is newspapered over from the inside in such a way that it's impossible to see any part of the interior. Leave the yard and lawns unattended and tell the neighbors to call you and the cops the minute they see anyone poking around.

There's one party I've heard about who, for good measure, thumbtacks a note on the front door of her vacant foreclosure buy-apologizing to her "cracked slab" expert for missing her appointment with him for the "soils test". It seems she's not been bothered with any IRS redemption ever since she's left notes of similar disasters regarding "non-conforming" improvements, kitchen "burnouts", asbestos "poisonings", septic system problems, etc.

Information provided by this website is for informational purposes only and is not a substitute for professional advice. Please consult your investment advisor and/or attorney before entering into any transaction. Read our privacy policy.

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