A Mortgage on a House and a
Subsequently Filed Tax Lien-which lien has priority the bank or the IRS?
This is a question that
clients often ask us.
The typical scenario is that a
couple buys a house, and then due to financial difficulties, they are unable to
pay their taxes, and the IRS files a lien against the house.
There is concern from the
clients and they ask what takes priority, the tax lien or the mortgage?
New York is a race state and
if the mortgage was recorded and duly perfected, then it has priority over a
subsequently filed tax lien.
See Citizens Bank, N.A. v.
Nash, No. 2:20-cv-00351 (E.D. Pa. 2021) which involved a lien priority
fight between the IRS and the bank holding the taxpayer’s mortgage.
The bank erroneously recorded a release of its mortgage and that error caused
it to lose the lien priority fight with the IRS. An excellent article on
this case can be found at Procedurally Taxing blog at https://procedurallytaxing.com/irs-wins-lien-priority-fight-with-bank/
The question we are next asked
is whether the IRS will foreclose on their tax lien and seize the house to
satisfy their tax debt. The IRS rarely forecloses on tax liens because they
need to satisfy the mortgage first, as a result of the sale, and they do not
want taxpayers to lose their homes.
In addition, in Kings, Queens,
New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, or Putnam
counties, there is a $179,950 homestead exemption per spouse who owns and lives
in the house. Therefore, a married couple who owns and lives in the house can
protect $359,900 in equity. A homestead exemption applies after a mortgage but
before a tax lien. Therefore, if a house had a $700,000 fair market value and a
mortgage of $500,000, and a bank foreclosed on its lien, the bank would receive
$500,000, the homeowners $200,000, and the IRS nothing.
So what is the impact of an
IRS tax lien on a house if the IRS does not foreclose on the tax lien? The
IRS tax lien will prevent the taxpayer from selling or refinancing their
house for 10 years. A tax lien is a lien against a home for ten years.
If a homeowner wants to sell
or refinance their house and is subject to a tax lien, they can contact the IRS
and request a satisfaction of the lien by paying the tax at closing.
Taxes, interest, and penalties must be paid to the IRS by homeowners. Sometimes
the IRS will waive certain tax penalties, so homeowners should hire a lawyer or
CPA to negotiate with the IRS on their behalf.
Those with questions about
foreclosures and tax liens should contact Jim Shenwick 212-541-6224 &
jshenwick@gmail.com, who has an LLM in taxation from NYU Law School.
