Tax Sale of Real Property: The Rights and Interests of the Taxpayer and the Purchaser

If you listen to the radio or watch late night TV, you know that the IRS has considerable powers when it comes to collecting unpaid taxes, penalties and interest. Included in these powers is the right to seize and sell real property in which a delinquent taxpayer has an interest, although there are some limits on what real property can be seized and sold by the IRS.  For example, pursuant to Section 6334(a)(13)(B)(i) a taxpayer’s personal residence is generally exempt from seizure unless a judge or magistrate of a District Court approves the seizure after giving the taxpayer the opportunity to be heard.

In any case, a taxpayer whose real property is seized by the IRS has the right, pursuant to IRC Section 6337, to pay the amount due to the IRS prior to the sale and have the property released by the IRS and returned to the taxpayer.  Furthermore, in the case of real property that is sold at a tax sale, the taxpayers, their heirs, executors or administrators, or any other person having an interest in the real property, or any person on their behalf, has the right to redeem the property anytime within 180 days after the sale. This redemption right can be sold to a third party, friendly or not, or the purchaser at the tax sale. In order to redeem the property during the 180 redemption period, the taxpayer or anyone with an interest in the real property must pay the purchaser the amount paid at the IRS sale and interest at the rate of 20% per annum. If the purchaser is not located within the county of where the property is located or attempts to avoid payment of the redemption amount, the redeeming party may make the payment to the IRS.  If the taxpayer exercises the redemption right, the property and the parties are treated as if the seizure and sale never happened.

What is confusing to many is what the purchaser’s rights and interest in the real property are during the 180 redemption period.  Once the purchaser at a tax sale makes full payment to the IRS, the IRS gives the purchaser a Certificate of Sale. The Certificate of Sale identifies the real property purchased, the identity of the taxpayer whose taxes are being paid, the name of the purchaser and the price paid. The Certificate of Sale does not give the purchaser any ownership rights in the property nor does it give the purchaser access to the property.  Furthermore, in the case of rental property, the purchaser does not have the right to any of the rental payments during the 180 day redemption period.  Instead, during the 180 day redemption period the taxpayer retains all rights to the property, including possession and ownership and right to receive rental payments.  In essence, the Certificate of Sale gives the purchaser the right to the property 180 days after the sale, but only if the taxpayer fails to exercise his redemption right.   Similar to the taxpayer’s right to sell his redemption right, the purchaser may transfer his Certificate of Sale to a third party, who would then be entitled to either the property after the redemption period passes or payment of the redemption amount.

If the 180 redemption period passes and the taxpayer does not exercise the redemption right, the purchaser can exchange the Certificate of Sale for a deed to the property from the IRS.  Pursuant to IRC Section 6339, the deed is considered to operate as a conveyance of all right, title and interest the delinquent taxpayer had in and to the real property. Many tax sale purchasers recognize that investing in tax sale property can be a good investment because they either purchase real property at a bargain price or are paid their purchase price plus interest of 20% per annum.