Are Federal Tax Liens Wiped Out by a Foreclosed property at a Sheriff sale?
So what happens to liens after a sheriff’s sale. Well, in most cases, a federal tax lien is not automatically wiped out by a foreclosure sheriff sale. The survival of a federal tax lien after a foreclosure depends on several factors:
1. Lien priority: Federal tax liens generally take priority over other types of liens that are recorded after the tax lien. However, some liens, such as a mortgage that was recorded before the tax lien, may have priority over the federal tax lien.
2. Sale proceeds: If the foreclosure sale proceeds are sufficient to pay off all liens with higher priority than the federal tax lien, any remaining funds would be applied to the tax lien. If there are not enough proceeds to satisfy the tax lien, it will remain attached to the property.
3. IRS right of redemption: Even if a senior lienholder forecloses on the property, the IRS has a 120-day right of redemption. This means that the IRS can choose to buy the property from the successful bidder at the foreclosure sale price within 120 days of the sale.
4. Discharge of property: The IRS may choose to discharge the property from the federal tax lien if the remaining equity in the property is insufficient to satisfy the tax debt. However, this is at the discretion of the IRS.
I’m Ted Thomas, and today I’m answering the question, “Are Federal Tax Liens Wiped Out by Foreclosure?” There’s a lot of confusion for the average person when it comes to real estate liens. I’ll clear the air for you.
After all, there are property tax liens, state liens, federal liens, mortgage liens, security deeds, deeds of trust, and income tax liens. Wow, where is all of this going?
I will cover property tax liens. Tax lien certificates are the principal you need in order to understand the topic and the answer to the questions, are federal tax liens wiped out by foreclosure, and can a federal tax lien be removed?
Table of Contents:
What Happens After a Foreclosure Auction to an IRS Tax Lien?
Liens on property drive people crazy. Property tax liens include federal liens, IRS liens, state liens, even judgment liens. I’m sure you’re getting the idea.
So are federal tax liens wiped out by foreclosure? Do IRS tax liens stay with the property on an auction?
I’m going to take a few minutes to give you the inside scoop and the answer. But first, I need to inform you, I am not an attorney, a broker, or a certified public accountant.
My expertise comes from doing deals and spending the last 30 years in the trenches working with tax liens and tax deeds.
Prior to working with tax liens and tax deeds, I worked in the foreclosure business, where I handled dozens of unique and stressful situations, mostly involving mortgage real estate.
From 2008 to 2012, thousands of homeowners ended up at foreclosure auctions due to over lending.
Lenders like real estate because it can be evaluated and appraised. The lender can look at it before they lend money. The lender is looking for security for the loan when they lend.
Extra mortgages create a burden for the borrower. Excessive loans bury property in debt and ultimately crush the property and the investor with high monthly payments.
The crisis of 2008 through 2012 was caused by over lending and easy money. Borrowers took on liability over their limits and slowly buried themselves in debt.
Which Liens Survive Foreclosure?
Federal and state liens usually come to the property from nonpayment of taxes and business debts. These liens add to the burden. They pile on creating excessive debt. The debt becomes like a snowball, rolling down the snow-covered mountain.
So do state tax liens survive foreclosure, and does an IRS lien supersede a mortgage?
Rarely will you see a federal or state lien foreclosing on real estate. Most foreclosure is the result of a mortgage loan in default. This is because the mortgage is usually recorded as one of the first liens on the property.
Some states use trust deeds as the loan document.
Private investors use a contract for deed, sometimes called a cash for deed when selling to private parties.
In all instances, the property owner in foreclosure has defaulted and not paid the mortgage loan.
For clarity, the lender made the loan based on the value of the property and the borrower’s ability to pay based on income.
When the lender is unable to collect mortgage payments, the lender will hire an attorney to sue the property owner and recover the collateral and security.
The homeowner is in default, and the lender is attempting to recover the collateral. If the lender made a loan of 80% or 90%, the lender has taken big time risks.
Are Federal Tax Liens Wiped Out by Foreclosure?
Are federal tax liens wiped out by foreclosure?
The answer is that the foreclosure auction will clear out, that is, wipe out all other liens that are junior to the foreclosing lien. In most instances, the lien we are talking about is considered the first loan, by most outsiders.
The loan is a mortgage and is filed as junior to the tax lien, and many foreclosure properties will reveal multiple liens are filed after the mortgage lien.
For example, a federal tax lien, a state lien, or a judgment from a court are all subsequent – junior to the foreclosure. That translates to all junior liens being wiped off the property.
Which of the Following Tax Liens is a Junior Lien?
The first lien is always the tax lien, and the first mortgage is generally filed after the tax lien.
If the mortgage is in the foreclosure process, any other liens after the mortgage filing are junior or subsequent.
The foreclosure wipes out all junior liens, the federal tax liens, a judgment lien, any encumbrance junior to the foreclosing lien.
The foreclosure lien wipes out all junior liens in regards to the property. The junior liens have now been deleted from the property; however they are still 100% in effect against the person… the individual.
Does a Tax Sale Extinguish a Mortgage Lien?
The property is now clear and only has the tax lien and the first mortgage.
If the mortgage is foreclosing, it will be foreclosing on the amount of the mortgage. If you buy at a foreclosure auction, you are purchasing the property for this loan. The banker is happy. They have someone who has paid off the loan.
These facts are not well understood. A mortgage foreclosure means the bank is trying to recover 100% or more of what they have lent or what the borrower signed as a mortgage. The purpose of the foreclosure process is recovering the foreclosing lender’s collateral and security, and the title will change from the property owner back to the lender.
At a tax lien auction, the county is only selling for the past due taxes and the tax sale wipes out the mortgage.
County Tax Lien vs Federal Tax Lien Priority
The key to this whole process is not the title or the authority of the lien holder. For example, the IRS must wait in line, which is determined by date and time.
In other words, all liens have priority established, not by the name of the company or the county office. The priority is established by date and time. First in place is first to be paid.
The tax lien was first in place and must always be paid, usually followed by a mortgage.
If the mortgage forecloses, the mortgage wipes out all liens that were filed at a later time.
Summary
We hope you learned a lot from Ted’s lesson, “Are Federal Tax Liens Wiped Out by Foreclosure?”
A property can have multiple liens on it. Which liens are wiped out at an auction depends on the order of the liens and the type of auction you are attending.
An auction, whether a property tax lien foreclosure or a foreclosure on a mortgage, wipes out the subsequent or junior liens.
The property tax lien is always first on the property. Usually, the mortgage is second.
If you’re attending a tax sale where the property is being sold by the county to collect the back taxes, then the mortgage and all subsequent liens are wiped out.
If you’re attending a mortgage foreclosure, then the liens after the mortgage are wiped out, but not the lien on the mortgage or any lien that comes before it. As a general rule, junior liens are wiped out at these auctions, but not the senior liens.
In conclusion, a federal tax lien is not automatically extinguished by a foreclosure sheriff sale, and its survival depends on the specific circumstances of the case. It is advisable to consult with a qualified tax attorney or tax professional for guidance on addressing federal tax liens in the context of a foreclosure.
If you’d like to know more, Ted Thomas can teach you. For over 25 years, Ted’s been teaching students the secrets, strategies, and safest ways to profit from investing in tax delinquent property.
There is no one more qualified than Ted, America’s leading authority on tax lien certificates and tax defaulted property investing, to show you how to do this.
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Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.
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