IRS Redemption Rights On Tax Liens

Question: Two years ago we helped our son buy a home in our Gilbert neighborhood. Our son has had a drug problem and could not qualify for a mortgage loan. Therefore, we did a $180,000 no-interest mortgage loan from us to him. Our son has disappeared again. Therefore, we are working with a title company to foreclose on our $180,000 mortgage, and then sell the home. There is an IRS lien on the home. In other words, after the foreclosure sale, and we become the successful bidder at the foreclosure sale, the IRS will have 120 days to determine if the IRS wants to buy the home from us. What does that mean?

Answer: In general, that means that your son owed taxes to the IRS, and that the IRS has a lien on this home for the amount of those taxes. If there is a foreclosure sale and you become the successful bidder, the IRS then has 120 calendar days after the foreclosure sale to enforce this IRS lien by paying you off, and then selling the home to recover this payment to you plus the amount of the IRS tax lien. The IRS, however, rarely does anything to enforce an IRS lien. Therefore, after this 120-day period, you should be able to then sell the home.

Note: The purpose of the IRS 120-day right of redemption is to prevent the foreclosed property from being sold at the foreclosure sale for less than fair market value just to avoid payment of any IRS tax lien. Internal Revenue Code § 7425.

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