Realty411 Magazine Featuring Scott Meyers | Page 46
Below are some general ideas/concepts to discuss
with your real estate attorney (it is suggested that you
hire an experienced attorney who is very familiar with
the laws on foreclosure) when embarking down the
foreclosure path.
becomes the owner for $400,000. Typically, all junior
liens are wiped out. However, with the postsale right of
redemption, the IRS has 120 days from the date of sale to
redeem the property; that is, the IRS can pay the
foreclosing lender only $400,000 and force the sale to the
IRS. Now, where the foreclosing lender thought they
were going to get a windfall, they will actually suffer a
loss of $160,000 (the amount they were owed less the
amount they received).
When a junior IRS lien appears on the public record
and there is significant equity in the property, a full credit
bid ($560,000 in the above example) should be made in
order to protect the foreclosing lender’s interests.
What if there are no government liens on the property?
There are some potential advantages to credit bidding less
than the total amount owed. Below, we discuss a few.
We will be using the same assumptions as above, with
one caveat: no federal tax lien appears on the property.
IRS/Government Liens
First, we believe that the only time to open with a
full credit bid is if a federal tax lien exists in a junior
position (one needs to check with their attorney as to
other government {or quasi government} liens, if the
same rules apply). The reason for this is that, although
the IRS lien may not have priority to the bidder's lien
due to the IRS lien typically being recorded after the
foreclosing lien was in place, the IRS has a postsale
120 day right of redemption; thus, if the end bid is less
than what is owed, and the IRS exercises its right of
redemption, the foreclosing party may experience a
potential loss.
Taxes
For example, let's assume the following:
Without a federal tax lien on the public record, it
makes sense from an income tax standpoint to open the
bidding lower than the amount owed to the foreclosing
lender. With a full credit bid, the lender may be subject
to paying income tax on the interest owed to the lender
even though the lender did not receive any cash. By
opening the bidding lower, the lender would not have to
pay taxes on the unrealized interest and would have a
valid argument that the property is worth less, resulting in
a lower basis (remember, the property reverted to the
foreclosing lender for the opening bid). If the lender were
to then sell the property after holding it for at least one
year, the lender may have a longterm capital gain which
is usually taxed at a rate considerably lower than ordinary
income.
(a) On February 1, 2018, a first position deed of trust is
recorded in the principal amount of $500,000.
(b) On March 29, 2018, a second position deed of trust
is recorded in the principal amount of $75,000.
(c) On June 29, 2018, the IRS records a Notice of
Federal Tax Lien in third position in the amount of
$50,000.
(d) On December 1, 2018, the borrower misses the first
interest payment and fails to make any subsequent
payment to the lender.
(e) On January 30, 2019, the lender starts the
foreclosure process.
(f) The foreclosure sale is set for May 29, 2019.
(g) The foreclosing lender is owed $560,000 (including
principal, interest, late fee, and foreclosure fees)
(h) The foreclosing lender believes the property to be
worth $700,000.
If the foreclosing lender opens the bidding at
$400,000 (possibly to establish a low basis upon
possession of the property if the property reverts), and
no one else bids at the sale, the foreclosing lender now
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