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Buying a foreclosed property at auction with a federal tax lien?

On April 8, 2019 by

You are the winning bidder for a great price on a property at an auction. You have done minor repairs and upgraded the kitchen so you are ready to flip the property. However, during the sale, the title search shows a federal tax lien attached to the property. Now what?

First, confirm the lien was not filed in error by checking the property and that the previous owner are correct on the Notice of Federal Tax Lien. If this is the case, the IRS will rescind the lien. If the tax lien is correct, you must determine the position of the lien. If the lien is in the first position or senior position, the outstanding balance of the lien will have to be paid in full or negotiated with the Internal Revenue Service to pay the lien for less than owed. A release for the lien will be updated with the county records within 30 days of full payment or negotiated payment. 

Should the lien be in any position other than first, it is classified as a junior lien. With a Junior Lien, the IRS has a redemption period of 120 days from the date of the certificate of title is issued in which the IRS may elect to redeem the property. This means within 120 days, the IRS can pay your purchase price of the house and pay off the mortgages to preserve its claim. The IRS may reimburse you the cost for any repairs that were necessary to secure the property and/or prevent damage. However, the IRS will not reimburse for any upgrades to the property.

The common misconception is that the foreclosure sale wipes out all liens. This is not the case with Federal Tax liens, but there are tactics for dealing with a property encumbered by a tax lien.

Eric Klein

Eric is the Principal Attorney and President of Klein Law Group. He has spent over 20 years practicing law and guiding clients through some of the most challenging times of their lives.