Removing IRS Liens from Tax Lien Investments – Should You Worry?

I get a lot of questions and worry about Federal and IRS liens that could be on properties that our readers are purchasing at tax lien and tax deed sales. Or, I’ll get an email from a tax certificate holder who finds out that there is a large IRS lien on a property and think they’ve lost their investment.

I’ve found that IRS tax liens do not have to be as much of a concern as we make them out to be. And, I’ll discuss why shortly.

But first, let’s talk about IRS liens:

•  If a property owner fails to pay federal taxes and the IRS finds out about it, they will place a lien against the owner. This lien automatically attaches to any properties that the owner holds in their name.
•  How does a property owner remove an IRS lien from their real estate? Three ways: they can pay it off, they can let it expire after 10 years, or they can negotiate with the IRS (you’ve seen the late night commercials, but I’ll show you how it works below).
•  The IRS lien remains on the property unless one of the three ways discussed above happens. If you are issued a tax deed in a non-judicial foreclosure state, you’ll still have this IRS lien on your property.
• IRS tax liens as with most state and federal liens, have priority over tax lien certificates. They must be dealt with or will have to be paid off if you are issued a deed.

However, in practice, these liens are typically wiped out thru a judicial process.

JUDICIAL FORECLOSURE STATES

If you’re investing in a judicial foreclosure state such as DC, MD or NJ, your attorney will follow a process that will remove IRS liens entirely if your foreclosure is successful. How will your attorney make this happen?

Per federal statutes, the lien holder must notify the IRS that they are foreclosing on a lien with a federal lien on it. Specifically, your attorney will send out a notice early on in the process (called a 25-day notice since the IRS has 25 days to respond) that seeks the IRS consent to take the property free of their IRS lien(s). Then, when the foreclosure is complete, your attorney will send another notice (called a 120-day notice since, again, they have 120 days to respond) that tells the IRS the foreclosure is final and they can redeem the property (aka “pay you off”), if they choose, within 120 days.

These statutes from the IRS can be found on their website (http://www.irs.gov/irm/part5/irm_05-012-004.html)

The IRS almost never takes actions on these properties. I’ve only heard of it once or twice and that was because the lien was a very large amount and the property had lots of value. If they do respond because there are tons of equity in the property, then that property will most likely redeem anyway by the homeowner or a mortgage company.

NON-JUDICIAL FORECLOSURE STATES

Non-judicial tax lien states (states that just issue you a deed with no legal foreclosure such as SC, AL, and FL) require an additional legal action called a quiet title action for removing IRS liens. I speak a lot about that here and here, but you’ll need to hire an attorney to file this and they will perform the same noticing.

I’ve also found that many of these liens were actually filed way in the past. Check your title work and you’ll probably find that the IRS lien was filed close or after their 10-year expiration period. You may be able to just wait it out until you reach this anniversary.

NEGOTIATING WITH THE IRS

In the rare case that the IRS lien wasn’t eliminated during your quiet title or judicial foreclosure, you can still negotiate to reduce the debt to ‘cents on the dollar’.

No, I don’t suggest you call those late night 800 numbers. You can do this just as easy yourself.

You’ll need to prove to the IRS that there is not sufficient equity in the property to payoff the lien if it is sold. The specifics can be found in IRS Code 6325 and involves filing a form found under Publication 783. Basically, you’ll need to provide a valuation of the property plus title work showing any outstanding liens superior to the IRS lien. You’ll submit the entire application to the regional IRS office who will review the details and come up with a settlement amount if it’s found that the IRS can’t be made whole.

Keep in mind, any settlement amount that the IRS gives you to discharge the debt is just the beginning of a negotiation. You can definitely argue your case to get your initial offer amount lowered. Just be able to provide facts–appraisals, real estate agent opinion of values, repair costs–that support your numbers. I’ve only been thru process once. It took about four months and I managed to get the lien discharged off the property for a number that still allowed me to make a profit on the property.

From the IRS perspective, if they don’t settle with you, they may be left with selling the property at a federal tax sale where the property will normally go for a bottom-of-the-barrel price at auction.

As alluded to earlier, IRS liens shouldn’t be a huge worry when you’re doing your due diligence before a tax auction or upon taking a tax deed. My focus is always on the property itself ensuring it is viable and I’ll get a redemption out of it as I’ve discussed elsewhere in my blog and in my e-books

2012 Colorado Tax Lien Certificates Auctions

Although it feels like it’s still summer…the Fall auctions are about to kick off.  The first of which are in Colorado.  Colorado is an easy state for new investors to get started in–many of the auctions are online and it’s hard to make a mistake with the long redemption period and good property values.  I’ve added a schedule of Colorado tax lien certificate sales (called a Colorado Certificate of Purchase) for those that are interested.  There are several counties that will sell their tax liens online and I would recommend anyone interested in buying liens to take a look.  Those are hosted by Real Auction.

Learn more on my comprehensive state guide on Colorado Tax Lien Certificates.

Colorado tax liens rank high for their safety but low on their interest rate.  Depending on the county, the auction is handled as a round-robin or with a premium or some combination thereof.  It’s a three-year redemption period after which you can apply for a treasurer’s deed for the property you own the lien on. You won’t need a Colorado attorney for tax liens unless you get a treasurer’s deed and file for a Colorado quiet title.

Here are the dates Colorado tax lien auctions for 2012: 

My New South Carolina Tax Liens E-Book on Kindle

As my e-mail newsletter subscribers know, I’ve recently completed my second Kindle e-book.  My first one was a strategic look on how to buy Florida Tax Lien Certificates including where to focus your efforts to boost your yields and maximize the safety of your investment. Although the title suggests it’s just a beginner’s guide, I’ve included specific advice for more ‘seasoned’ Florida tax lien investors.

Now, I recently completed the second of my tax lien investing guides.  This one is on investing in South Carolina tax liens and you can find it here on Amazon.  South Carolina is one of my favorite states to buy tax liens in–the rates are decent at 12%, the real estate market is fairly strong, and the overbid style of the auction keeps alot of your competition away.  Because you might be investing more than 50% of the value of the property, it’s a higher risk state and you absolutely must perform good due diligence before you attend the auction.

The first auction begin during the first week of October and continues in the different counties for the next three months.  As always, if you have any questions, you can subscribe to my newsletter for free and email me anytime directly from there.

Can you REALLY get Properties via Tax Lien Certificates?

I recently came upon a great opinion piece from the Denver Post entitled “What Tax Liens Really Mean” by Diane Holbert and John Lefebrve.  It’s an article I wanted to write but they sum up the points I was going to make pretty well.  

It’s rare to get a deed out of buying tax lien certificates.  Very rare.  All the hype out there about buying properties at pennies on the dollar is really misleading new investors and brings a bad name to investors who buy tax lien certificates.  In fact, tax liens are one of the few markets out there that isn’t controlled by large institutions, marketing budgets and crony capitalism.  Plus, individual investors can make a reasonable return compared to the volatility of the stock market and/or bank accounts.

Here are a couple great points from the article focusing on Colorado tax lien certicates but this could be applicable anywhere:

In Colorado, one is more likely to be struck by lightning than lose one’s home to a tax lien investor.

Douglas County sells approximately 1,275 tax liens annually, yet has has issued only four treasurer’s deeds involving a structure over 14 years. Two may have been occupied, one was a carport, and the fourth was a cabin on public land.

Arapahoe County sold 20,000 tax liens over the past 11 years, yet has issued only 11 treasurer’s deeds (condition and occupancy unknown).


Jefferson County sells about 2,087 tax liens annually, and has issued only five treasurer’s deeds involving a structure. Those were: an uninhabited, boarded-up, four-unit multifamily dwelling; a home that had to be gutted due to excessive animal waste; a mountain property crushed by a tree; a dwelling scheduled for demolition by the city, once the wild animals were removed; and one which housed an occupant whose family was unwilling to help her maintain her residence.

Weld County sells an average of about 4,000 tax liens a year. In the past 30 years, it has issued only four treasurer’s deeds on improved property (condition unknown).

Pueblo County has issued only 17 treasurer’s deeds with improvements over the past 19 years. All were uninhabitable or the owners were uninterested in keeping the property.

Broomfield County has never issued any treasurer’s deeds on property with structures.

Rio Blanco County issued one deed in 12 years which contained a structure and was condemned for health reasons.

Rio Grande County has no record of a treasurer’s deed being issued.

Ouray County has issued one on a property unoccupied since 1985.

Lincoln County transferred six properties with structures on them in the past 11 years. Most did not contain any humans, doors or windows.

Phillips County transferred five properties by treasurer’s deeds with improvements over the past 10 years. They were uninhabitable (unless you count the 125 cats), and the others were already condemned.

 Read more: Guest Commentary: What tax liens really mean – The Denver Posthttp://www.denverpost.com/opinion/ci_21167845/guest-commentary-what-tax-liens-really-mean#ixzz224BdWULq

Truth vs Fiction in the Media about Tax Lien Certificates

One thing that bugs me about as much as hyped-up, promotional websites trying to sell you the perfect “system” to buying tax lien certificates is the media’s take on tax lien investors.  There’s a recent article that was released by the AP based on a report by the National Consumer Law Center (see the article here).  First, the title of the article indicating that people are losing there homes for $400 is total BS.  Really?  If I could simply buy tax lien certificates for $400, wait a few months, then get a good condition house and make tens of thousands of dollars, I’d do it in a heartbeat.  

But, it’s simply not true.

At all.

Here’s what I’m talking about:

Report: Some lose homes over as little as $400

“The elderly and other vulnerable homeowners are losing their homes because they owe as little as a few hundred dollars in back taxes, according to a report from a consumer group.

Outdated state laws allow big banks and other investors to reap windfall profits by buying the houses for a pittance and reselling them, the National Consumer Law Center said in a report being released Tuesday.

Local governments can seize and sell a home if the owner falls behind on property taxes and fees. The process helps governments make ends meet at a time when low property values and the weak economy are squeezing tax revenue.

 But tax debts as small as $400 can cause people to lose their homes because of arcane laws and misinformation among consumers…”

Look…The average redemption period for a a tax lien certificate is 2-3 years.  Since most tax liens are sold for the past year’s taxes, the homeowner would have not paid taxes for 3 years or more.  Then, there’s usually a tax deed or quiet title process which takes another six months.  During that entire time, the homeowners are receiving delinquency notices from the county, required noticing from the tax lien investor, or they are being served in person with the legal documents clearly stating that the house is being foreclosed on for taxes.  Yes, the initial delinquent bill might have been $400, but in order to lose the home, you’re talking about years worth of taxes.

Here’s my reader challenge:

If you can show me a situation where an “elderly or vulnerable” homeowner lost a house for only $400 in delinquent property taxes (I won’t count legal fees), I’ll give you the floor and let you write an article about it, front page on my blog. 

Upcoming 2012 Tax Auctions: The DC Tax Lien Sale

Looking for an 18% return with your tax lien investing this summer?  The DC tax lien auction is scheduled to begin July 16, 2012 and is one of the few tax auctions held this time of year. The DC tax lien sale is a live tax auction with an overbid component so many of the larger investment funds will probably not attend.  That being said, the highest quality properties will still have a lot of competition.

I’ll discuss below many of the finer points about the DC tax lien auction, but I want to cover a few basic items:

How does the DC Tax Lien Auction work?

The District of Columbia sells most of their delinquent taxes each year in July.  Each lien purchased earns a solid interest rate of 18% (accrued 1.5% per month beginning in the month of the auction).  However, this rate is reduced by an overbid that does not earn any interest and is simply returned to you once the lien redeems.  I have an older post which discusses how an overbid works generally.


In DC, the bidding starts at the amount of delinquent taxes owed.  Then it increases in price until the highest bidder takes the lien.  The difference between the starting bid and the final winning bid amount is the overbid.

In order to bid, you’ll have to register early and in person — between July 9th and July 18th for the 2012 tax auction.  There is a deposit requirement of 20% of your winnings so you’ll need to estimate how much you plan to purchase and deposit at least 20% of that amount.

If you’re looking for more detailed information, check out the FAQs from the DC Office of Tax and Revenue.

When is a Tax Deed issued to the Property?

If you’re looking to the DC tax auction in hopes of getting a property on the cheap, you may want to re-evaluate your goals.  It’s very rare that you’ll actually go thru the entire legal foreclosure process and actually end up with the property in your name.  However, you’ll absolutely want to begin foreclosing on the property to ensure you don’t lose your investment entirely.

So, plan on hiring a tax lien attorney if you’re going to buy tax liens in DC.  You can file a foreclosure action six months after the sale.  Most attorneys will charge you beforehand to begin the case, usually a few thousand dollars.  The good news is that the delinquent taxpayer must pay your attorney’s fees in order to fully redeem (pay) their taxes as long as they are reasonable.  These fees do not earn interest.

The District of Columbia statutes require that you file a judicial foreclosure on your lien.  This means that your attorney will run title, notice all the parties on title and file a foreclosure action in the court to get a judge to issue a final judgment.  Once the judge rules in your favor, you can go to the DC Office of Tax and Revenue, pay any outstanding taxes and bills that may be due, and get issued the tax deed.  The Office of Tax And Revenue will actually use any overbid you may have to pay these amounts.  If you have more left over than what is due, they will refund the remaining portion of the overbid to you.

What are the Headaches and Risks of Buying DC Tax Liens?

Like everything else associated with Washington DC, nothing is easy dealing with the government.  The Office of Tax and Revenue is very difficult to deal with.  They are understaffed and not willing to help out tax lien investors.  This leads to a lot of frustration if you haven’t prepared the paperwork they require just to get your money back from a redemption.  They are also slow to give you your funds once a lien redeems.  Plan on at least 3-4 months from the time the taxpayer pays to the time you receive your check. Also, you’ll want to check your properties on a monthly basis to see if they have redeemed online and make sure DC knows about it.


Another risk of investing at the DC tax lien sale is the danger of blighted and dilapidated properties.  DC government is very serious about making sure the properties in the District are in good shape and not falling apart.  As such, they love to fine homeowners for issues such as uncut grass, flaking paint or abandoned homes.  They will also stick on a penalty tax rate of up to 10% on a property they deem as blighted.  Unfortunately, you are responsible for paying these completely should you win your case and want to get a tax deed to the property.

Additional Investments thru Subsequent Taxes

One great thing about DC tax liens is that you have the right to purchase taxes that accrue on the property after you win the lien at auction.  These taxes come due twice a year and all you need to do is contact the Office of Tax and Revenue to make this investment.  You earn 18% on this entire amount!

Other Resources about the DC Tax Lien Sale

You’ll want to checkout the DC Tax Sale website to see what properties are available and for additional information.  I’ll have an additional resource about frequently asked question regarding DC tax sales on my DC state tax lien guide.

What are the Five Best States for Safety on Your Tax Lien Certificates?

In my last post, I discuss what I thought were the best states to consistently earn a high yield on your tax lien certificates.  Today, I want to discuss the reason why I chose tax lien investing for a majority of my investment capital.  It’s all about safety of investment.   You’ve probable seen all of the hype about “no risk investing” etc etc.  I hate that crap.  There IS risk to any investment and tax liens more than others. 

However, if you know what your doing and do your due diligence, tax lien certificates can be extremely safe.

And why not?  They are ahead of just about every lienholder.  You basically step in as the government authority and the lien-to-value ratios can be less than 1% of the value of the house.  Who’s going to lose their $200,000 home over a $1,500 tax bill?  And more so, what mortgage company in their right mind would allow this to happen.

I’m not going to go on about how you can lose money in tax lien certificates–you can read my earlier post about the risks of tax lien investing.  I want to focus on those states that you can safely put your money in and rest easy every night.  You won’t earn a huge double-digit return, but I’ll guarantee its better than putting it in the bank.

Arizona

Arizona tops my list for the safest place to buy tax lien certificates.  It’s a bid-down state meaning that you don’t have to bid more than the delinquent taxes and the millage rate is very low compared to other states.  For those new to tax lien investing, the millage rate is the percentage of the value of the property that is taxed.

So, you’re total investment should initially only be less than 2% of the actual value of the property.  Plus, Arizona has a (more…)