Do IRS Liens Have Priority Liens Over Mortgages?

If you fail to pay all the income taxes you owe, the IRS may take one or all of several actions including placing a lien on your real property. The IRS is required to notify you of its intent. If you fail to cure the tax burden or enter into an installment agreement within the time period provided, the IRS will record a blanket lien in the public records in the county in which you live.

IRS Lien Defined

An IRS lien provides the federal government with a legal claim against your property when you do not pay your taxes. The lien helps ensure the government eventually receives the monies due it since the lien must be paid when the property is sold. The IRS files a Notice of Federal Tax Lien with the county court to notify creditors, including mortgage lenders, that the government has perfected an interest in your property. This "blanket lien" attaches the security interest to all of your assets, including your personal residence or rental property, and to assets acquired after the lien is placed but before you pay off the lien.

Property Owned When IRS Files Lien

If you own real property when the IRS files a blanket lien, the IRS lien's position depends on what position the IRS lien was in when the IRS filed the Notice. If you owned the property free and clear of any mortgages, then the IRS lien goes into first position. Any subsequent mortgages would be in second position unless you used the mortgage proceeds to pay off the IRS lien. If a mortgage already exists on your property, the IRS lien goes into second position if you only have a first mortgage. The IRS lien would go into third position if you also have a second mortgage.

Purchasing Real Property

If you purchase real estate while your IRS lien remains, the IRS lien will be in first position. Therefore, traditional lenders will not grant a new mortgage to a home buyer who has an outstanding IRS tax lien. The one exception is a purchase money mortgage or seller-financed mortgage provided by a nontraditional lender, the seller.

Purchasing Real Property -– Lone Exception

Some states do allow sellers to finance the acquisition of real property using a purchase money mortgage even though a lien has been filed. Provided the lender complies with all state law requirements, the IRS' position is that a purchase money mortgage given in good faith to secure a real property loan has priority over an already recorded IRS tax lien.

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About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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