Surplus Funds After Spokane County Tax Foreclosure: Who Actually Gets Paid

Hypothetical Scenario: The Surplus That Vanished

Consider this hypothetical: An investor purchases a tax-foreclosed property in Spokane County for $185,000 at the county's annual tax foreclosure sale. The delinquent taxes totaled roughly $12,000. Simple math suggests approximately $173,000 in surplus funds should exist after the county takes its cut for taxes, interest, penalties, and costs.

But here's where it gets complicated. The former owner had a recorded deed of trust with $95,000 remaining. A judgment creditor had recorded a $40,000 lien. A contractor had filed a construction lien for $22,000. And the former owner himself believes he's entitled to whatever remains.

Who gets what? And more critically for the investor — do any of these encumbrances survive the tax foreclosure, or does the county's tax deed extinguish them?

The answers lie in Washington's tax foreclosure statutes and Spokane County's administrative procedures for surplus distribution.

Washington's Tax Foreclosure Framework Under RCW 84.64

Washington handles delinquent property taxes through a judicial foreclosure process governed by RCW 84.64. Unlike some states that use tax lien certificate sales, Washington counties foreclose directly on the property and sell it at auction.

Under RCW 84.64.080, the county treasurer initiates foreclosure proceedings when property taxes remain delinquent. The county must provide notice to the record owner and attempt to notify parties with recorded interests in the property. After the foreclosure judgment, the property sells at public auction.

RCW 84.64.080 specifies that the tax foreclosure judgment "shall have the effect of annulling all private liens, including mortgages and judgment liens" on the property. This is the critical provision — Washington tax foreclosures generally extinguish junior encumbrances rather than transferring them to the buyer.

However, extinguishing liens from the title doesn't mean lienholders lose all rights. They may have claims against the surplus funds generated by the sale.

The Surplus Distribution Hierarchy

When a Spokane County tax foreclosure sale generates proceeds exceeding the delinquent taxes, interest, penalties, and administrative costs, the county must distribute surplus funds according to RCW 84.64.080.

The statute establishes a priority framework:

1. Delinquent taxes, interest, and penalties — the county recovers everything owed first
2. Costs of the foreclosure proceeding — including publication, legal fees, and administrative expenses
3. Junior lienholders in order of priority — based on recording date and lien type
4. The former property owner — receives whatever remains after all valid claims

The complication arises in determining which lienholders have valid claims and in what order they should be paid.

Recording Date Determines Priority — Usually

In Washington, the general rule under RCW 65.08.070 is "first in time, first in right" for recorded interests. A deed of trust recorded in 2019 has priority over a judgment lien recorded in 2021, which has priority over a mechanics lien recorded in 2023.

But mechanics liens complicate this analysis. Under RCW 60.04.061, a construction lien relates back to the date work commenced on the property, not the recording date. A contractor who began work in January 2020 but didn't record the lien until December 2023 may have priority over a judgment creditor who recorded in March 2020.

For Spokane County surplus claims, this means investors and potential claimants must examine not just recording dates but the underlying nature of each encumbrance.

The Claims Filing Process

RCW 84.64.080 requires the county treasurer to hold surplus funds and provide notice to parties who may have claims. Former owners and recorded lienholders should receive notification of available surplus.

However, the statute places the burden on claimants to file their claims properly. Spokane County's Treasurer's Office handles surplus distribution, but claimants must typically provide:

• Proof of their recorded interest (certified copies of the deed of trust, judgment, or lien)
• Documentation establishing the amount owed
• Evidence of proper recording with the Spokane County Auditor
• Identification and authorization to claim funds

Claimants should verify current procedures directly with the Spokane County Treasurer, as administrative requirements may change.

Why This Matters to Foreclosure Investors

Investors purchasing at Spokane County tax foreclosure sales need to understand the encumbrance landscape for two reasons.

First, most recorded encumbrances are extinguished by the tax foreclosure judgment. That deed of trust, those judgment liens, the mechanics lien — they don't transfer to the investor. The property comes with clean title as to private liens (though other issues may exist).

Second, understanding the recorded encumbrances helps predict competition and bidding behavior. When substantial recorded debt exists against a property, junior lienholders may bid aggressively to protect their positions. A judgment creditor facing $40,000 in losses may push the bidding higher than an investor expects.

Additionally, certain interests may survive the tax foreclosure. Federal tax liens have specific protections. Easements and covenants running with the land typically survive. Public utility liens and certain municipal assessments may have priority over or parity with county taxes. Each requires separate analysis.

Federal Tax Liens: The Exception That Matters

Under 26 U.S.C. § 7425, the Internal Revenue Service has the right to redeem property sold at tax foreclosure if proper notice wasn't provided. The federal government gets 120 days from the sale to exercise this redemption right.

For Spokane County sales involving properties with recorded federal tax liens, investors face uncertainty during this redemption period. The IRS rarely exercises this right, but the possibility exists — and it means you can't immediately flip or develop the property with confidence.

Investors should search for federal tax liens through the Spokane County Auditor's records and, potentially, directly through federal channels, as some federal liens may be filed separately.

Common Title Search Gaps

Standard title searches may miss issues that affect surplus distribution or post-sale title:

Unreleased satisfactions: A deed of trust may have been paid off, but if the lender never recorded a reconveyance, it appears as an active encumbrance. The lienholder's surplus claim would be invalid, but their recorded instrument still clouds the title chain until resolved.

Assignment chains: The original beneficiary of a deed of trust may have assigned their interest multiple times. Current assignment holder information may not be obvious from recording records, complicating surplus distribution.

Subordination agreements: Lienholders sometimes agree to change priority. A first-position deed of trust holder who subordinated to a later-recorded instrument has different surplus claim priority than recording dates suggest.

Partial releases: Large parcels sometimes have partial lien releases for portions sold. The remaining property may carry different debt amounts than original recorded instruments indicate.

What TitlePin Can Help You Check

Before bidding at a Spokane County tax foreclosure sale, investors should examine the full encumbrance picture. TitlePin can help you review recorded instruments in Spokane County Auditor records to identify:

• Deeds of trust and mortgages with recording dates and original amounts
• Judgment liens and their recorded priority positions
• Construction liens and their filing dates (though relation-back investigation requires additional research)
• Federal tax lien filings that may trigger redemption rights
• Lis pendens indicating active litigation affecting the property
• Assignment and substitution documents that affect current lienholder identity

Understanding the recorded encumbrance landscape helps investors anticipate surplus distribution dynamics and identify title concerns that may require additional investigation. Note that determining precise surplus distribution amounts, confirming lien satisfaction, and verifying current legal priority requires direct inquiry with the Spokane County Treasurer's Office and potentially legal counsel.

After the Sale: Confirming Title Clearance

Once you've purchased at a Spokane County tax foreclosure sale, the county issues a treasurer's tax deed. This deed operates as the evidence of your ownership and the extinguishment of junior private liens.

Investors should still run a post-purchase title search to confirm that all expected encumbrances appear in the chain as extinguished by the tax foreclosure judgment. Occasionally, recording errors or timing issues create apparent title clouds that need to be addressed.

Title insurers may have specific requirements before insuring tax-foreclosure-acquired properties. Some require waiting periods, especially where federal tax liens were involved. Others may require quiet title actions to address specific encumbrance issues. Understanding the recorded history helps you anticipate these requirements.

Key Takeaways

• Washington tax foreclosures under RCW 84.64 generally extinguish private liens (mortgages, judgments, mechanics liens), but lienholders retain claims against surplus funds
• Surplus distribution follows priority rules based primarily on recording date, with exceptions for mechanics liens that relate back to commencement of work
• Federal tax liens carry a 120-day redemption period under 26 U.S.C. § 7425 — verify federal lien status before bidding
• Claimants must file properly with the Spokane County Treasurer; verify current procedures directly with that office
• Review the full encumbrance chain before bidding to anticipate competition and post-sale title insurance requirements

Sources

• RCW 84.64.080 — Foreclosure proceeding and sale procedures: https://app.leg.wa.gov/rcw/default.aspx?cite=84.64.080
• RCW 65.08.070 — Recording priority statutes: https://app.leg.wa.gov/rcw/default.aspx?cite=65.08.070
• RCW 60.04.061 — Construction lien priority and relation back: https://app.leg.wa.gov/rcw/default.aspx?cite=60.04.061
• 26 U.S.C. § 7425 — Federal tax lien redemption rights: https://www.law.cornell.edu/uscode/text/26/7425
• Spokane County Treasurer's Office (for current surplus claim procedures): https://www.spokanecounty.org/138/Treasurer