Are you wondering do federal tax liens have priority over mortgages? Anyone who’s attended a property auction has most likely encountered land with multiple liens, so it’s important to understand how lien priority works. Learn what affects you and what doesn’t.
I’m about to share with you a competitive advantage. This lesson is all about who or which entity gets priority and paid on liens. Once you understand the priority of liens on real estate, you’ll never worry about Internal Revenue Service (IRS) liens on tax properties.
Today I’ll answer your question, “Do federal tax liens have priority over mortgages?”
This information is valuable. I’ll share the answer with you, and give you a process that’s simple.
I’m Ted Thomas, and I’ve been involved with tax liens and tax deeds for 30 years. I started as an investor, and over the years, I became a guide, a teacher, and a coach as I grew my expertise and made more profits.
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PROPERTY TAXES AND TAX LIENS
Do federal tax liens have priority over mortgages?
To assure you just don’t get an answer and then immediately forget, I’ll give you a foundational understanding which will make sense so you’ll remember. Then I’ll show you how you can have a competitive advantage when you know the answer.
In all states in the USA, the rules are the same because the USA is a republic. The republic allows you and I the privilege of owning real estate.
When you own property, you’re allowed to subdivide it, sell it, build on it, and raise crops and cattle on it. You can even rent the property. The only requirement is you must pay property taxes.
THE ASSESSOR’S PARCEL NUMBER
Here’s the answer you’re looking for. The republic allows states to be formed, and the states allow counties to be formed.
When the county is formed, the property surveyors draw maps and divide the property into acres, usually 40 acre lots which are also subdivided.
The 40 acres is given a number which is dated. That’s the tax number. It may be called another name like folio number or assessor’s parcel number.
THE FIRST LIEN
There are numerous names for it, but it’s the property tax number. It’s dated and time stamped, and that lien is the first lien on the property. It will be a tax lien.
That means anyone who purchases the property or is even given the property, will owe tax on that property.
All of these systems were created hundreds of years ago, long before Congress passed a law about income tax which I’ll come back to.
The tax lien is the first lien because it was recorded the day the property was surveyed, and the republic owned the property as they own all property in the United States. The republic awarded it to the state, and the state created the county.
It’s the first lien on the property, and it will never be paid in full because when you pay the tax lien on the property, they immediately put another lien on it.
THE SECOND LIEN
The second lien on the property, usually, though not always, is from a bank or a lender because the owner needed a house to live in or the farmer needed a barn and borrowed from a bank.
The lien from the bank is dated and time stamped at the official county records, and it’s after or subsequent to the original tax lien. It has a later date and time.
All lien priority is determined by date and time, not what the government agency or fancy-named bank has written on the lien. Date and time are the key.
To review, we have a first lien, which is the lien to the local county. We now have a second lien, which is a lender, and more than likely, that will be a mortgage.
A hundred years later, in the 1900s the Congress of the United States passed laws regarding tax on income. That law has been changed many times, but it’s decades after the original property tax lien.
Now let’s step backwards in time to the 40-acre parcel and the farmer raising crops. He sells the crops, and he uses the money to build a house.
Now we have land and real estate on top of the land. The county would charge taxes on the land and the real estate.
Ten years later, there’s a big storm, snow, ice, slush, and flooding. The farmer’s crop is ruined.
The farmer repairs the damage, but he does not pay income tax on the crops he sold. So the IRS files a lien. That means they recorded a lien at the public records. The farmer does not pay.
Now there are 3 liens on the property.
- The first lien is the property lien.
- The second lien is the bank lien, the mortgage or deed of trust.
- And now we have an IRS lien.
All liens are recorded and stamped at the county records with date and time.
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HOW THE TAX MAN COLLECTS DELINQUENT PROPERTY TAXES
Let’s say twenty years later, the farmer dies of a heart attack. His beautiful wife is swept off her feet by a rich man in a shiny pick-up truck. His daughter has gone off to Vanderbilt for her degree in psychology. No one paid the property tax.
They all abandoned the home and the farm. The tax collector sends notices, and nobody responds. The tax collector announces a sale for delinquent property taxes.
THE TAX SALE
The treasurer uses his or her power to conduct the auction. The treasurer has many powers to levy taxes, collect taxes, and if uncollected, seize the property.
Enter Mr. Savvy auction-buyer Ted Thomas student who is trained and knows what to do.
The property is valued by the tax assessor at $400,000.
Ted Thomas always says buy the neighborhood not the property. Well, it turns out this neighborhood, after 40 years, is elegant with country homes and gentleman farmers. So now it’s worth $400,000.
The treasurer is going to auction the property. Mr. Savvy auction buyer discovers a first lien, a mortgage loan, and a tax bill from the IRS for $10,000. However, it’s 18 years overdue. No one has paid the interest, so it’s now $60,000.
The tax collector places a minimum bid of $60,000.
No one bids. They see $60,000 to the tax collector, $100,000 on the mortgage and $60,000 to the IRS. The deal has too many liens. Mr. Savvy auction buyer who knows the rules, makes a minimum bid of $60,000, and the auctioneer accepts the bid.
Let’s review. The tax lien on the property is $60,000 that’s now paid at the auction.
The mortgage is wiped out because a tax auction wipes out the mortgage. Mr. Savvy auction buyer knows this because his coach made him read the rules.
The rules are the IRS has a lien and they have 120 days to come forward and purchase the property from Mr. Savvy auction buyer for exactly what he paid plus interest.
The property value according to the tax assessor is $400,000. The problem is that it’s an ugly worn out property in disrepair.
However, if the real estate is bulldozed, the 40 acres is in the middle of many gentleman farmers. Many of which will pay $300,000, and Mr. Savvy auction buyer only spent $60,000.
JUNIOR LIENS ARE EXTINGUISHED
Let’s review. What happened? Mr. Savvy auction buyer knew the treasurer conducts the tax auctions. The treasurer is authorized to remove, to extinguish, to delete junior liens like a mortgage.
Mr. Savvy auction buyer also knows if the IRS wants the property, they will step forward and pay his $60,000 plus interest. What’s the risk?
IRS LIEN VS MORTGAGE
Do federal tax liens have priority over mortgages? No. Let’s summarize.
- The assessed value is $400,000.
- Tear the property down, and it’s still worth $300,000.
- Pay $60,000 and wait 120 days.
Bottom line, get very close to a quarter million dollars from a little training.
THE IMPORTANCE OF DATE AND TIME
Priory of liens is determined by date and time, not the power of the bank or the government agency. The first to record a lien at the official county records is first in time and in priority.
The entity that files (records) at the official county records is the first lien. The second will be determined by date and time.
In this instance, the IRS was a distant third.
We hope you enjoyed Ted’s lesson, “Do Federal Tax Liens Have Priority Over Mortgages?
In short, the answer to the question is No. The priority of a lien is determined by the date and time it was recorded.
The first lien is always the tax lien. When the parcel was created, it was given a number, the property’s tax number, and it’s always the first lien on the property.
Usually the second lien is the mortgage, and a federal lien, like an IRS lien, would usually be filed after a mortgage.
At a tax defaulted property auction, where the property is sold for unpaid property taxes, the mortgage is deleted from the property. The county has the power to remove subsequent liens and encumbrances
If there’s an IRS lien on the property, the IRS has 120 days to purchase the property from the buyer for the amount the buyer paid for the property plus interest. If the IRS doesn’t do that, then the buyer keeps the property. If the IRS does, the buyer still profits.
In a nutshell, lien priority isn’t determined by how powerful or fancy the institution is that put the lien on the property. It’s determined by when the lien the was placed.
If you’d like to know more about investing in tax delinquent property, there’s no one more qualified to teach you than Ted Thomas, America’s leading authority on tax lien certificates and tax defaulted property investing.
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