If you bought property at a nonjudicial foreclosure where the IRS held a junior federal tax lien, the government has 120 days from the sale date to buy the property from you at a statutory formula price. That is the IRS right of redemption after a nonjudicial foreclosure sale, created by 26 U.S.C. § 7425(d), and while it is exercised infrequently, it clouds your title for the full window and controls what you can do with the property in the meantime.1Office of the Law Revision Counsel. 26 USC 7425 – Discharge of Liens
How Long the Redemption Window Lasts
The clock runs 120 days from the date of the foreclosure sale.1Office of the Law Revision Counsel. 26 USC 7425 – Discharge of Liens If local law grants a longer redemption period to private creditors in a similar position, the IRS gets that longer period instead. The statute uses “whichever is longer,” so 120 days is a floor, not a ceiling. Once the applicable period expires without IRS action, the government’s right is gone for good.
Confirm the Pre-Sale Notice Was Given
Before you rely on the 120-day window as your worst-case scenario, verify one thing about the foreclosure itself. Whoever conducted the sale had to give the IRS written notice at least 25 days beforehand under 26 U.S.C. § 7425(c)(1), sent by registered or certified mail or delivered in person to the district director for the area, attention chief of the special procedures section.2eCFR. 26 CFR 400.4-1 – Notice Required With Respect to a Nonjudicial Sale If a notice of federal tax lien was filed more than 30 days before the sale and the seller skipped that 25-day notice, the sale did not disturb the tax lien at all.1Office of the Law Revision Counsel. 26 USC 7425 – Discharge of Liens In that case you are not dealing with a 120-day redemption right; you are dealing with a full tax lien still attached to the property you just bought. The same problem arises if the sale was postponed and the seller failed to renotify the IRS of the new date.
What the Title Cloud Means While the Window Is Open
Your ownership during the 120 days is real but conditional. Title insurers will not issue a clean policy. Any commitment or policy issued in this period will carry an exception for the government’s redemption rights, which makes selling or refinancing on ordinary terms effectively impossible. The property is frozen unless you take steps to get the IRS to release its right early.
Keep detailed records from the moment you win the bid. Every dollar you spend on the property, and every dollar it generates, feeds directly into the price the IRS would owe you if it redeems.
Whether the IRS Will Actually Redeem
The IRS does not redeem every property where it has the right to. The decision comes down to a financial test: is there enough equity to justify buying the property back and reselling it? The Internal Revenue Manual directs the agency to compare the property’s fair market value against two benchmarks — what you paid at the foreclosure sale, and the total of all liens senior to the foreclosed mortgage.3Internal Revenue Service. 5.12.5 Redemptions If fair market value reasonably exceeds both figures, redemption is on the table. If it does not, there is nothing worth recovering.
The agency also weighs geographic and economic conditions, property type, and how local redemption law would affect a resale. Specific dollar thresholds that trigger an investigation are set by the IRS Advisory executive and vary. As a practical matter, the IRS generally lines up a secured or guaranteed bidder before it recommends redeeming — someone committed to purchasing the property from the government afterward. That prospective buyer must typically post a nonrefundable deposit of at least 20% of the agreed bid amount, with a $1,000 minimum.3Internal Revenue Service. 5.12.5 Redemptions
Redemptions are funded from a dedicated revolving fund capped at $10 million in total appropriations.4Office of the Law Revision Counsel. 26 USC 7810 – Revolving Fund for Redemption of Real Property The fund is replenished when redeemed properties are resold, but the limited pool keeps the agency selective. Properties with thin equity margins or complicated resale prospects tend to get passed over.
What the IRS Pays You If It Redeems
When the government does redeem, the price follows a formula in 28 U.S.C. § 2410(d). Three components are added together.
- The purchase price you paid at the foreclosure sale. If you were the foreclosing lender who credit-bid, this figure includes the amount of the obligation your lien secured, to the extent that obligation was satisfied by the sale.5Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien
- Interest at 6% per year on the purchase price, running from the sale date until redemption is finalized.5Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien
- Net expenses: what you necessarily spent maintaining the property after the sale, minus any income the property generated and minus a reasonable rental value if you personally used it during the holding period.5Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien
The income offset catches purchasers off guard. Rent you collected during the window reduces what the IRS owes you. So does the rental value of the property if you moved in yourself. Property taxes, insurance premiums, and emergency repairs are legitimate expenses, but if you rented the place out for $2,000 a month while making those payments, the rental income comes off first.
The formula does not reimburse you for anything you paid toward senior liens. If you paid off a first mortgage or a senior property tax lien to protect your interest, that cost is yours. The redemption price covers only the foreclosure purchase itself and post-sale carrying expenses.
How the Redemption Is Carried Out
The process is administrative. No new lawsuit is filed. The IRS conducts an internal review comparing the potential recovery against the costs of redeeming, maintaining, and reselling. Once officials authorize the expenditure from the revolving fund, the agency provides formal notice to you of its intent to redeem and tenders the redemption price calculated under the formula.4Office of the Law Revision Counsel. 26 USC 7810 – Revolving Fund for Redemption of Real Property
When the redemption is complete, the IRS issues a Certificate of Redemption. Recorded in local land records, that document transfers ownership from you to the United States and extinguishes your interest in the property.
Getting the Right of Redemption Released Early
Waiting out 120 days with a clouded title is not always practical. You can ask the IRS to give up its redemption right early by filing Form 12519, the Application for Certificate of Release of Right of Redemption, with the IRS Advisory group responsible for the area where the property is located.
The application asks you to show there isn’t enough equity to justify redemption. Include a professional appraisal of current market value, a copy of the foreclosure deed, and documentation of any senior liens still encumbering the property. The IRS runs the same fair-market-value test it uses for its own decisions. If the value does not meaningfully exceed the sale price plus senior liens, there is no reason for the government to hold on.
If the IRS finds meaningful equity, it will not release the right for free. The agency may require a payment representing the equity it would have captured through redemption and resale. That figure is negotiated based on the gap between appraised value and the costs the IRS would incur. Once you agree on terms and pay, the agency issues a Certificate of Release that clears the title cloud immediately, without waiting out the remaining days. The appraisal alone typically runs several hundred dollars for a single-family home, so build that cost into your timeline from the start.