Thursday, March 22, 2007

Life Estate and IRS liens

I was supposed to close on a house last Tuesday, but the Title search revealed that the house was in a Life Estate agreement. A Life Estate agreement transfers ownership to someone else (called the Remainder Estate) and allows the person with the Life Estate ownership to live in the property for as long as they are alive.

The Title search also revealed that the IRS had put a $29K lien on the house (owed by the life estate tenant). The purchase price for the house is only $23k. Of course, the title company will not write insurance in this situation. This is where normal buyers would give up I think and walk away. But I already have close to $2k in this in legal fees, lender fees and the appraisal fee, so why not persist?

I read John Reeds Book on Buying Real Estate at 20% below market value and he discusses buying from people that own life estate or remainder estates as one strategy for getting below market prices. Houses with IRS liens are also a source, so this home seems to have 2 flaws that could work to my advantage.

The life estate owner in this case is an 86 year old woman who is in a nursing home and will never live in the house again. Her niece is the remainder owner and has power of attorney for her Aunt. In theory (per the actuarial tables in Reed's book) the Aunt owns only 16% of the home. Does this mean that at most the IRS could only collect 16% of the sales price? This would certainly benefit the niece. It seems to me that this would be a good negotiating tactic with the IRS.

There are a couple of options that I see:

  • The niece could negotiate with the IRS to settle for something much less than the $29K (or find that the $29K is erroneous)
  • The niece could give up and sell her remainder portion to me for a steep discount and leave the negotiation to me (or I could wait until the Aunt dies, which could be a long time or not - in which case the life estate interest in the house would disappear - I assume wiping out the IRS claim)

At this time I just have to wait until the seller exhausts her options to provide a clear title.


Diane Cipa, The Closing Specialists® said...

In Pennsylvania, a life estate is subject to inheritance taxes. Check the inheritance tax issues in your state. Also, the IRS lien is wholly against the entire value. That doesn't mean you can't negotiate. Have at it.

Paul said...

Thanks for your comments and information