Tax auction Sale date?

Question

Curious if anyone has experience with Tax auction properties..... In my state there is a delinquent tax auction held once a year, then there is a 12 month redemption period. If not redeemed the property is signed over to the winning bidder.

A couple of details. The money is paid with receipts on the day of the tax sale.  The deed also reads as the sale is THAT DAY in about the most clear way.

But the deed isn't filed until AFTER the redemption period.

So you have a deed that says the property was sold on say, September 27th 2022. But the deed is signed and filed in early 2024 after the redemption period and after the county gets it all together.

When would the IRS consider the sale final?

Kory Reynolds · Answer

I'll fully admit, I have zero experience in dealing with tax auction transactions with my client base, but this is an excellent question, so... @Michael Plaks challenge accepted!

On the date of the auction, you hold a the rights to the delinquent taxes and associated payments - all of the benefits of ownership that you have at that point are only related to those delinquent taxes, and the future rights you might obtain after 12 months.  The general IRS test on determining acquisition date (this I have had to dig into a number of times) - do you have all the benefits and burdens of ownership, regardless of when title is transferred.  I didn't dig too deep here, but at least one SC county notes on their website that your interest in the property doesn't actually vest until after the expiration of the redemption period.  Following that up with when you have the benefit of ownership of real property - it isn't until you actually have taken possession of the property.

So then, the question comes, when that redemption period closes at the end of 12 months, does your holding period start with when you acquired the right to collect the delinquent taxes and interest? Or can you convey that original acquisition of this right to collect the delinquent taxes, which you then effectively exchange for the Deed if the redemption period has not been executed - but kept the same holding period?

My initial reaction from my walk through above would be that the holding period in the Real Estate doesn't begin until you have the rights and benefits associated with the real estate - so the earliest at the end of the redemption period, but really beginning once you take possession and can start doing stuff with the property.

Some further digging I found some examples of it, but if you were a paying client I would be spending more time to see if there were any subsequent changes to this rule - at the very least Bloomberg isn't calling it out on me ;) .  Check out Rev. Rul. 72-200, 1972-1 C.B. 233 (If you can find it on Google, I can only find it in Bloomberg / Answer Connect) - in which case there was an IRS Tax Lien Sale, with a mere 120 day redemption period.  It was determined that the holding period for the acquired real estate started after the end of the redemption period, given that is when the acquiring party started to enjoy the benefits of the real estate ownership.  Assuming  this revenue ruling still stands, it mirrors the SC situation nicely, meaning it would support your acquisition date of the real property not starting until you have taken possession.

I think this would be highly dependent on the terms of the local jurisdiction as well, so what might be correct in one jurisdiction, could be completely wrong in another depending on the rights acquired related to the property.

But happy to be pointed where I am wrong! In the end unless you are in an odd spot of selling the property within 12 months of the wrong date, it won't really matter for tax purposes.

Michael Plaks · Answer

I have always treated the date of the auction as your acquisition date for tax purposes. Hopefully it's not one of those days when @Kory Reynolds rubs my nose into a gap in my knowledge.

Bruce Lynn · Answer

One monkey wrench in Texas is that the redemption period does not start with the sale date, but rather the deed filing date.  Normally they are not that far apart, but could be a month or two.

Wherever the OP is, I would think might be different than TX as it sounds like he doesn't get full ownership of the property until 12 months later.  Almost sounds like they're buying the tax lien vs the deed, but that's not exactly what they post.

@Justin W.   Are you 100% sure the deed is issued, but not filed until a year later.  It might help if you post what state you are in.   Who holds that deed until it is filed?  The county?  If so in my opinion you're buying a lien, not the deed.  But I'm just some old Texas hick and my opinion doesn't really matter.   Are you asking this in regards to holding periods for capital gains tax calculations ST vs LT?

Kory Reynolds · Answer

What will matter from an IRS perspective is when the burdens / benefits of ownership have actually been transferred.  So if I were your CPA, the questions I would be asking about what burdens and benefits you have related to the property before the end of the redemption period - what are your responsibilities related to the property? Can you rent, occupy, or utilize it in any manner? Are you responsible for any of the expenses of that property during that period? Can you renovate it? Could you sell it? Do you have any control over what the existing owner can do to the property? When do you obtain the rights to do these things?

Those are the questions the IRS would have on when determining when it was acquired by you.  What the official sale date according to the state might be is an interesting factoid, but it is just one of the facts and circumstances considered for "acquisition date" for IRS purposes - Benefits and Burdens is the test they are concerned about.

Kory Reynolds · Answer

Hey Michael - we definitely have a lot of consensus here - based on the facts in Texas, I would agree with you that it sounds like the burdens and benefits of ownership (or at least a significant amount of them) are transferred as of the auction date, and based on what you stated, I would also feel comfortable taking the same position for a TX property - it would certainly not contradict the revenue ruling given the related restrictions on the property and taking possession are an entirely different fact pattern, making the ruling moot in your scenario.

Which I think highlights even more one of my closing points (and your point as well on Jurisdictions) - this likely changes wildly by jurisdiction.  My (non lawyer) read of the SC rules paints a much different picture in those jurisdictions than what you discuss in TX - where it sounds like you own effectively nothing but a tax note until the close of the redemption period - you can't take possession and rent the property, real estate taxes during the period are still the responsibility of the original owner, etc.

The below is from the County of Charleston SC's website regarding the tax sale and how they work in that particular jurisdiction - certainly not the authoritative source of their state statutes, but for posting on a forum, I'll take it for now.  These apparent rules in SC do seem to mirror the revenue ruling (contrast that with TX rules).  Caveat to OP...find a lawyer to work with what the particular rules are in your specific county, and if they are any different, or if there are any caveats here regarding your obligations that we are not exploring.  This bit from the Charleston County website certainly paints a different picture than Michael has in Texas - where the Charleston County tax auction bidder has no rights to the property until after the deed is filed.

If the property is not redeemed by one year from the date of sale, then the property is tax titled to the highest bidder or their assignee approximately three months later through a tax deed. You have no rights to the property until the tax deed is filed at the Charleston County Register of Deeds (ROD) conveying the property to you as the new owner.

Once again in this post - go work with a good attorney in your state that is familiar with these rules, along with your CPA (local or not) to walk through the analysis as it applies to your particular jurisdictions.

Michael Plaks · Answer

Thanks for your trademark research, @Kory Reynolds. Speaking of trademarks, I'll respond with my trademark skepticism.

The starting point is consensus. We're totally on the same page that "burdens and benefits" of ownership is the key. However, is it clear in the OP case when exactly those burdens and benefits were transferred? I'm not sure. Besides, these determinations are almost certainly state-specific, possibly even county- or municipality- specific as you pointed out.

In my home state of Texas, burdens are conveyed on the date of the tax auction, as far as I know. This includes insurance, local taxes, utilities, maintenance etc. Most of the benefits, starting from the occupancy right, are conveyed as well. The previous owner cannot stay there during the redemption period. Some benefits are restricted, particularly the rights to remodel or resell, per my understanding. (Disclaimer: I'm not a lawyer, so my understanding may be worthless.) Looking at the totality of these factors, my conclusion was that the "benefits and burdens" test is met on the auction date.

Does it contradict the Revenue Ruling you cited? I don't think it does. In that specific case, the property was seized by the IRS, and the buyer did not receive a deed but merely some "certificate of sale" and was specifically barred from possession of the property until after the redemption period. That is a distinctly different set of circumstances from Texas tax sales that I'm somewhat familiar with.

Which of the two scenarios is closer to the OP case? I'd suggest that TX tax sales are a better match than the IRS levy.

This discussion makes me suggest that there is no clear answer to the OP question and that it would be location-specific, facts-specific and likely advisor-specific. What say you, Kory?

PS. Again, I'm no lawyer. My layman's understanding is that the date of recording a deed (or any other document) is not the date when it is considered effective. It is the date when it is executed.

Bruce Lynn · Answer

Lucky there is SC tax sale expert on here John Underwood.  Maybe he can chime in and give you a great answer.

Justin W. · Answer

Kory, thank you. That’s really good information and I appreciate the time.  I tend to agree that makes sense to me.

I’ll Show a deed example.   The wording is the only reason I can possibly consider the auction date as the sale date. It reads so clear but maybe the IRS disagrees. 🤷‍♂️

““WHEREAS, on Sales Day, the ninth (9th) day of October, 2022, the Delinquent Tax Collector did, during the usual hours of sale, after due advertisement, sell the said property of the said John Doe, tax defaulter (s), to James Doe, his heirs and assigns, the purchaser (s), hereinafter known as "grantee (s)", and the highest bidder at such sale, for the sum of $XX.xx and gave a receipt for the total amount of said purchase money to him; and

WHEREAS, more than twelve months have elapsed since the date of said sale and the defaulting taxpayer (s), and grantee from the owner or any mortgage or judgment creditor have failed to redeem said land so sold for taxes:

NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that I, Jill Doe., Delinquent Tax Collector of and for the County and State of aforesaid, in consideration of the premises, and the sum of $xx.xx paid by the said grantee(s), James Doe have granted, bargained, sold and released, and by these present do grant, bargain, sell and release unto the said grantee(s) James Doe and his heirs and assigns. “”

Tax auction Sale date?

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