What are the rules of funds redemption after foreclosure auction?

3 Replies

I found an attractive multifamily property going for foreclosure.

Property assessment price is around 1M. Unpaid mortgage on this house is about 500K.

In one of the adds about the upcoming auction I found a note:

The property will be sold subject to the redemption rights in favor of the Internal Revenue Service by virtue of the tax lien(s) recorded in Registry of Deeds… (I found 15K)

2nd message: The premises will be sold subject to a one-year redemption rights in favor of the United States of America by virtue of the Notice of Lien for Fine and/or Restitution Imposed Pursuant to the Anti-Terrorism and Effective Death Penalty (In the listed book I found a federal tax lien of 450K)

The same person owned several more properties that are also in a foreclosure process. There are multiple state tax records for hundreds of thousands of dollars.

My question is if I win the auction, will I be responsible for the federal tax lien of 450K and all other IRS and state liens in addition to what I pay at the auction? Basically, will auction funds go first to the government and remaining to the bank or the bank keeps all the funds and I will be responsible for the liens beyond what I pay at the auction?

Whom can I talk about it, a title attorney?

My understanding would be you would be buying the property for whatever you get at auction and the liens wouldn't fall off but for the redemption period of those liens the government would be able to call them due which is typically rare but is a possibility. There's ways to mitigate that risk so you'd probably want to do your homework ahead of time to figure out what they are. A lot of the note investors on here can probably help you with that

The U.S. generally has an extended redemption period under Federal Law. They don't get a lien priority over the mortgage foreclosure unless they were recorded prior to the mortgage. Like the above poster said, the IRS could decide they want to redeem (which is extremely rare) and you would get your bid/purchase money back. The danger in the event of them redeeming is that if you did substantial repairs during the extended redemption period you may not get reimbursed.

Run the scenario by your lawyer and title company. I also believe you can get the IRS to waive their redemption period if it is a no-equity situation. 

I believe your lawyer has to formally certify/notify the IRS of the your purchase.  By law they have a window (I think it is somewhere about 120 days) to reply/answer your letter. Your lawyer should know the exact procedure and time frame. The IRS will have to decide if they want to redeem, if this is the case, they have to execute the sale and they will have to pay back what you have put in up to this point to include your lawyers fees, etc. Again, your lawyer should know how to navigate these waters. As far I understand it, the IRS will not engage because it is more costly to them and time consuming. They have a legal obligation to recuperate the money, so if there is not enough equity to get their money back and buy you out, then they will simply let it go. They have other legal tools to get their money.

just like stated in the prior post, run it by your lawyer. At the end, they should be filing the paperwork with the IRS for you. 

good luck. 

Visit the irs.gov website. A lot of my questions were answered on their Q&A section one day when I was bidding on a property with an IRS lean against it.

I didn't win the bid, but I was comfortable bidding on the auction after reading their website .