Taxpayers going through a tax sale of their houses can expect a long and oftentimes complex process, which makes knowledge of tax sale facts crucial for retaining the assets.
How to Get Back a Home After a Tax Sale
Step 1: Understand First How a Tax Sale Works
Tax Sale Definition: The state sells a property to satisfy a taxpayer’s unpaid tax debt. The sale can come in two forms: either through selling the deed or selling the lien.
A tax deed sale transfers the property itself from the taxpayer to the buyer. Whole ownership of said property transfers to the buyer from the taxpayer.
On the other hand, in a tax lien sale, the buyer gets only the lien or claim on the property, not the property itself. Tax liens work like a debt investment, as the successful buyer receives interest as well as the chance to foreclose the property if the taxpayer did not satisfy the debt during the redemption period.
For federal taxes, usually IRS tax liens and tax levies lead to a tax sale. However, the process is quite long compared to attaching of state taxes, as rules and regulations by the IRS provide ample time for the taxpayer to reply and negotiate.
Upon receipt of this information, the state can put a levy upon the property within 30 days. Continued delinquency can lead to the tax sale.
As for tax liens, the process starts with the IRS sending the Notice of Federal Tax Lien to all parties involved. The tax lien process takes some time, as the delinquent taxpayer receives many letters and notices from the IRS first before the Collection Due Process proceeds to the tax court.
Taxpayers who are currently undergoing the collection process may want to learn what to say and what not to say during an IRS interview. The faster the debt settles, or the lower the tax debt amount becomes, the better off for the taxpayer.
For state property taxes, the duration of appeals and process vary greatly. Tax liens and levies go with state tax law, and the state allows the taxpayer to pay the unpaid taxes over a number of years.
In comparison, the IRS can start the levy process within less than a year of delinquency, especially if the tax amount owed is greater than $10,000.
For example, the state of California usually gives the delinquent taxpayer five years to resolve the tax debt. On the other hand, New York real property law allows taxpayers only two years of tax delinquency; however, extensions of three to four years can also arise if the tax collector or court grants the motion.
Please note that tax sales for the state are not limited to just property taxes. Most states operate water and other utility operations necessary for society, and these charges can lead to state tax liens or levies.
Lastly, these taxes also carry penalties and fees, which can rack up the tax amount.
Step 2: Take Advantage of the Redemption Period Offered for Unpaid Property Taxes
For homes under a federal lien, IRS Rules and Regulations for Federal Tax Liens provide a very useful safeguard for redemption.
Delinquent taxpayers can redeem the auctioned property within 120 days or the limits provided by the state, whichever is higher.
The IRS also requires that a guaranteed bidder must advance at least 20% of the bid amount.
How does a taxpayer qualify?
The same regulations require that:
The taxpayer and IRS monitor the foreclosure sale, conduct an investigative redemption and determine if the property has sufficient value to cover the debt. The taxpayer must then notify the IRS that a guaranteed bidder is interested and then conduct the redemption.
Sometimes, the taxpayer might gather enough funds or find a guaranteed bidder after the redemption period expires. In this situation, the bidder no longer has the priority and must conduct business as if he or she is an ordinary purchaser.
For state taxes, most of the qualifications apply, although each state may have its own documentation and processes.
Step 3: Satisfy Delinquent Taxes
For federal tax liens or levies, specifically with the IRS (although federal student loans sometimes do occur), the delinquent taxpayer has ample time to negotiate.
As an example, a tax levy merits around five notices before the Collection Due Process starts. The taxpayer receives the first notice together with a tax form to fill out, and then repeats until the Final Notice to levy arrives, which then signals another additional 30-day time period before the levy takes effect.
Once the delinquent taxpayer satisfies the tax debt, or at least has a working plan to settle the unpaid taxes, the IRS can withdraw or cancel a tax levy or lien. The cancellation or withdrawal of said lien or levy can take 30 days, but after the lifting of the claim, the taxpayer can confidently claim ownership of a clean title on a property.
Step 4: Legally Lengthen the Process to Postpone Foreclosure
Both state and federal tax liens and levies have their own usually-complex process. A single step lacking can actually throw a wrench at the whole process.
For example, incorrect spelling of the owner’s name or property’s address or lack of communication can stall the court proceeding as the law requires exact and accurate details.
Paying close attention to all the notices and letters from the IRS and the state can really pay off, especially if there are mistakes.
For federal taxes, having a Currently Not Collectible status will postpone collection of taxes and levies. Applying for a CNC status can take some time though, and the IRS does not grant all applications.
Another possible option is to argue that the levy or lien is improper. For example, the IRS cannot levy a residence if the tax amount owed is $5,000 or less, so paying the fees and part of the tax can lower the tax to the point where the levy is invalid, as the tax amount does not meet the threshold.
Step 5: Bid Through Trusted Channels
If the delinquent taxpayer can only gather the funds after the redemption period, the taxpayer can bid on the auction or ask someone to bid for him or her.
A trusted friend or a relative can also show up as a guaranteed bidder. As long as he or she can pay 20% as a deposit, the IRS or even the state can prioritize him or her over other auctioneers as long as the delinquent taxpayer performs his or her due diligence and informs the creditor.
However, not all states allow guaranteed bidders. The taxpayer then has to participate in the auction, or at least have a proxy if he or she is still determined to get the house or property back.
Step 6: Offer to Rent
Sometimes, the taxpayer simply cannot gather the funds or find a guaranteed bidder to deposit a downpayment for securing the property. The house ends up auctioned to a third party and the taxpayer no longer has the ownership.
The taxpayer can instead work with the new owner. Some auctioneers go through the bidding process to procure an investment, rather than to purchase a new home.
This reason can help taxpayers stay on the property as renters. The new owner may prefer an old tenant, as the taxpayer has more experience about the property and clearly cares about the house.
All these steps can help taxpayers reclaim, or at least stay, in the auctioned property. Tax sales do not signal the end of financial freedom; as long as the taxpayers navigate through the tax sales process with proper information, the chances of getting back a levied property increases.
Do you have other useful tips for taxes? Let us discuss in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.