If you’re doing the pre foreclosure short sale business correctly, then you’re flipping your properties using either land trusts or options and never funding a deal. So what happens if you negotiate with the IRS to get a federal tax lien released and they find out that you did a short sale and flipped the property? It can be a disaster for you. That’s why you need to be careful when you’re working with the IRS on a property in foreclosure with a federal or state tax lien.
Here’s the problem. If you’re negotiating to get a tax lien released, then the only way to make that happen is to prove to the IRS that there REALLY isn’t any equity in the property. You may even have to “negotiate” another short sale with the IRS to prove that to them. Simply supplying them with the approval letter from the lender may not be enough for them. Additionally, showing them the property is a pre foreclosure isn’t enough for them. So in theory, after you’ve negotiated the short sale with them and proven to them that the property is only worth, say $200,000, and you do a simultaneous closing and make $40,000 on the deal, if they find out about it, they’re going to be upset. Is it any of their business that you flipped it? No. Is it any of their business that you made $40,000 on the deal? No again. However, they’re still going to feel “duped” and they will absolutely be upset about it.
So what do you do? Well, make sure if you’re using land trusts that the IRS knows up front that you buy all your pre foreclosure short sale properties using land trusts. Make certain they’re clear about this, because in order to finalize the tax lien release, they’re going to want to see a copy of the deed transfer… which, of course, is the land trust paperwork. I know of someone who made this mistake… that’s how the IRS found out about it and threatened legal action. Did anything happen to this person? No. Why? Because he did everything legally, it’s just that that IRS felt duped.
If you’re using Options, it’s not a big deal because there will be two deed transfers, which will make satisfying the IRS’s requirement for a deed faxed to them very easy.
Bottom line about getting a tax lien release. Contact your local state or federal tax office. Find out what they want and give it to them. Make certain if you’re using land trusts that they know that up front and it won’t be a suprise to them later on. It’s no fun for tax liens to show up on your pre foreclosure short sale deals. However with the right information, you can easily get over this hurdle.
Good luck! Let us know if you have any problems with this, we’ll be happy to help.
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Wow! That’s some great information. Thanks Marty!