Simulation: a fictional property for practice.

An IRS sale: which liens does the deed clear?

A rental duplex at an IRS sale has a bank mortgage recorded years before the IRS’s tax lien, and a contractor’s lien recorded after it.

A fictional duplex at an IRS sale of seized real estate. Federal rules apply in every state (26 U.S.C. 6339).

• Sale: IRS sale of seized real estate
• Value: About $410,000
• First mortgage: $185,000, recorded before the federal tax lien
• Contractor’s lien: $22,000, recorded after the federal tax lien, for work that started after the IRS filed its lien
• Title professional’s finding: The mortgage ranks ahead of the IRS lien; the contractor’s lien ranks behind it

Mission 1: What stays and what goes?

Pick the right answer.

• The deed clears the contractor’s lien, which ranked behind the federal tax lien, but the earlier mortgage stays
• The deed clears every lien, because the IRS sold it
• Nothing is cleared; I take every lien

The IRS sells only the taxpayer’s interest. Have a title professional rank every lien before you bid.

Mission 2: The real price

• Your winning bid (example): $120,000
• First mortgage that stays: $185,000
• Title work and holding through 180 days (example): $15,000
• Total: $320,000 for a $410,000 duplex, before repairs and selling costs

A $120,000 bid is really a $320,000 purchase. Your maximum bid must subtract the mortgage that stays.

Would you bid $120,000?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.