Considering buying a property subject to an IRS tax lien at judicial sale? Before you bid, you should confirm whether the IRS tax lien is prior to or junior to the mortgage being foreclosed.
Prior to the Mortgage?
If the IRS tax lien is prior to the mortgage being foreclosed, the IRS tax lien will not be foreclosed through the judicial sale, will remain a lien on the property and the amount of the lien must be paid in full before the lien will be released.
Junior to the Mortgage?
If the IRS tax lien is junior to the mortgage being foreclosed, the IRS tax lien will be foreclosed through the judicial sale and the lien on the property will be extinguished after the judicial deed is issued. However, the IRS will have a redemption period of 120 days after the date of the judicial sale (the “Redemption Period,” which may be a longer redemption period in some states) in which the IRS may elect to redeem the property subject to the IRS tax lien.
Redemption Process
The IRS redemption process is fairly involved and the IRS will generally only proceed with redemption if it has a solid offer in hand that would net additional proceeds after the IRS reimburses the winning bidder at judicial sale the amount bid for the property at sale. If the IRS does redeem the property, it would have to reimburse the winning bidder for the amount bid at sale, as well as any allowable maintenance expenses (as described in the Internal Revenue Manual).
From a legal standpoint, the winning bidder at judicial sale can record the judicial deed for the property prior to expiration of the Redemption Period and take possession of the Property. However, from a practical standpoint, a title company will not waive the Redemption Period when insuring the winning bidder’s ownership of the property (or a third party purchaser’s ownership of the property if the winning bidder immediately sells the property) until the 121st day after the date of the judicial sale.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Wendy M. Reutebuch | Real Estate, Real Estate Finance and Creditors’ Rights
Wendy represents clients in both Illinois and Wisconsin in a wide variety of commercial real estate and real estate finance transactions. In addition to handling acquisitions, dispositions and leases, Wendy also advises lenders on loan transactions, loan workouts, loan restructurings, forbearance and pre-foreclosure matters. If you need assistance with a related matter, contact Wendy.
