Can the Lender Foreclose if There Is a Federal Tax Lien?

by Angie Mohr Google

    If you owe money to the federal or state government for unpaid taxes, the government has the right to place a lien on your home. This encumbrance is recorded on the deed to the house and must be paid off before the house can be sold to a third party. In the case of foreclosure, however, a lender can still foreclose in many cases when an outstanding tax lien exists.

    Federal Tax Liens

    Federal tax liens most often arise from back income taxes owed by the homeowner. The Internal Revenue Service can register the lien on the property, even if it is the taxpayer's homestead. This lien gives the IRS the right to foreclose on the property itself, but it will only do so if there is enough equity in the property to pay out any superior liens and still be able to recover the IRS debt.

    Loan Priority

    A property may end up with several mortgages and liens against it over time. To determine what happens to each of these encumbrances when a house is foreclosed upon or sold, each is assigned a priority as to when it must be paid in relation to other liens. Most liens are ranked based on the date the lien is recorded. This is called the "first in time is the first in line" doctrine. This ranking also applies to IRS tax liens. For example, if a property has a first mortgage for $150,000 recorded in January 2009 and an IRS tax lien for $45,000 recorded in October 2011, the first mortgage lien is superior to the tax lien. The first mortgage holder can foreclose on the property and wipe out the IRS lien. The IRS, however, has 120 days to redeem the property, meaning that it can pay the purchase price of the house and pay out the first mortgage to preserve its claim. State tax liens are among the few exceptions to first in time; these jump to the head of the line regardless of when they were recorded.

    Recourse

    If your property is foreclosed upon and all subordinate liens wiped out, it does not necessarily mean that you are off the hook. Any lien holder, including the IRS, can go to court to obtain a deficiency judgment against you. This means that the debt you owe the IRS or other entity, although it is no longer attached to the property, is still your responsibility. Debt holders can enforce this judgment against other assets that you own or demand garnishment of your wages.

    Buying a Foreclosure

    Although a foreclosure wipes out any subordinate liens on the property, superior liens could remain. If the foreclosing entity does not immediately pay these liens out, the liens become your responsibility if you purchase the property. If you are considering purchasing a foreclosure, research the deed thoroughly to understand what encumbrances exist on a property before buying.

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    About the Author

    Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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