As attorneys in Houston, Texas, we are sometimes asked about foreclosure on property on which the IRS has a junior lien. In accordance with IRC § 7425, the Internal Revenue Service has the right to redeem real property which was sold in nonjudicial foreclosure action by a third party to satisfy an outstanding encumbrance which has priority over the Notice of federal Tax Lien. This means that after the property is sold at a foreclosure sale, the IRS can purchase the property at the price that the property was sold for at the foreclosure sale. In accordance with Title 28 U.S.C. § 2410(c), the Internal Revenue Service has the right to redeem real property which is sold in a judicial sale where the United States’ position is junior to the foreclosure party. The time period for a redemption after a foreclosure sale with respect to either a nonjudicial or judicial foreclosure is 120 days or the period allowable for redemption under State law, whichever is longer. In Texas, the mortgagor/property owner has no right of redemption if the senior lienholder is a mortgagee.
In addition to the sale price, if the IRS redeems the property, it must pay an amount equal to the excess of the expenses necessarily incurred to maintain the property over any income realized from the property, plus a reasonable rental value of the property (to the extent the property is used by the foreclosure sale purchaser or with his/her consent is rented at less than its reasonable rental value). The foreclosure sale purchaser has the right to be reimbursed for necessary maintenance expenses/fees incurred during the time he/she is in possession of the property. These expenses/fees are subject to review and approval either in whole or in part by the IRS. Specific maintenance expenses/fees to consider are those utilized to keep the property safe and intact. Examples of expenses to consider are: recording fees, insurance, and new locks for security purposes. The IRS will not reimburse for expenses to enhance or improve the property, such as cleaning, utilities, property taxes, or construction of structures.