A Mortgage on a House and a Subsequently Filed Tax Lien-which lien has priority the bank or the IRS?

 

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.