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Article of the Month for April 2005 Printer friendly version

Foreclosure and IRS' Redemption Rights

by Ward Hanigan

Debtors in trouble frequently owe the IRS for unpaid income taxes. IRS often secures its lien rights against them by recording (at the local county recorder's office) a Notice of Federal Tax Lien. Thereupon the tax lien automatically attaches to the taxpayers' equity in any property in their name in the county.

In most instances IRS is a junior lienholder in that its lien is usually the one most recently recorded, and therefore, the most susceptible to being wiped off by a foreclosure of any prior recorded senior lien (1st or 2nd, etc.)

If IRS' lien is wiped off by a trustee's sale it has the right to redeem the property from the new owner within the following 120 days. Then IRS would sell the property at its "redemption sale", presumably for a lot more than what it went for at the earlier trustee's sale. The sale proceeds go pro-tanto towards its incidental expenses, reimbursement to the redemption fund, the tax liability and then to the "party entitled" (the next junior lienor in priority at the trustee's sale). If IRS does not exercise its redemption right within the 120 days it will automatically expire.

IRS' redemption payment includes:

  • The winning bid plus 6% interest from the date of sale,

    PLUS

  • Expenses incident to the preservation of the property:
    • All payments made to senior lienholders,
    • Any necessary legal fees (i.e. title defense, etc.),
    • A prorated reimbursement for prepaid property taxes and fire insurance premiums.

    MINUS

  • Any income the new owner received from the property and/or the fair market rental value of the new owner's occupancy of the premises.
The practical consequences of an IRS lien recorded against property that's in foreclosure are:
  • Most of your competition will be frightened off because they won't be privy to how it works. Most of them erroneously presume that IRS' lien has a super priority . . . that it's not wiped out by the foreclosure of any senior lien.
  • The 120 day redemption period will prevent the new foreclosure owners from closing on any quick deal concerning re-financing or reselling the property unless they have negotiated a waiver from IRS. Will cost at least $1,000 or more.
  • The new owners should hold off doing any repairs/improvements or any formal move-out action that would encourage their competition to approach IRS to redeem the rejuvenated property near the end of the 120 day redemption period.
Generally IRS won't attempt to redeem property where the outstanding tax liability is less than $10,000 dollars. You can call the revenue agent listed on the recorded tax lien to get a "ballpark" estimate of what the tax lien currently amounts to. Also, IRS won't redeem if it doesn't have a "guaranteed bidder" for the property who has signed their Agreement To Bid and has put up the requisite 20% bid guarantee.

If IRS exercised their redemption right they'd pay off the foreclosure buyer and record their Certificate of Redemption. Then they'd advertise the property for sale in a local newspaper, announcing the particulars of the sale that would take place in their local offices approximately 20 days later. In addition they'd contact people who asked to be on their local bidder's list.

IRS' redemption sales are made without warranty of any kind concerning the condition of the property or the status of its title record. Most of their sales are by public outcry. The winning bidder must have sufficient Cashier's Checks, made payable specifically to IRS, to cover 20% of the top bid. The balance is due within 1 to 10 business days (set by the revenue agent). Upon payment in full IRS will issue the buyer a Director's Deed (which is the equivalent of a quitclaim deed) to record.

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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