Foreclosure on a tax lien may eliminate the mortgage lien attached to the property, which means you may be able to buy clear title to the foreclosure property. However, the answer depends on what type of tax lien is being foreclosed on. If the mortgage lien remains attached to the property, then the mortgage lender will still have foreclosure rights on the property. But if the mortgage lien is eliminated, then the buyer at the tax lien sale will take free and clear title to the property.
Types of Tax Liens
Tax liens can arise under either federal or state law. Under state law, tax liens may be state income tax liens, or more commonly, property tax liens. Under federal law, the IRS has authority to levy tax liens for unpaid federal income taxes.
While both state and federal law can create tax liens, only state law governs foreclosures and lien priority issues after foreclosure. Generally, each state's laws provide that a foreclosure eliminates any lien that does not have priority over the lien being foreclosed on. This means that a mortgage lien will remain attached to property after foreclosure of a tax lien that does not have priority over the mortgage lien. On the other hand, a mortgage lien will be eliminated by foreclosure on a tax lien that does have priority over the mortgage lien.
Property Tax Liens
The laws of every state provide that property tax liens have priority over any other property liens. As a result, foreclosure on a property tax lien will always eliminate a mortgage lien on the foreclosed property. Therefore, a mortgage lien is unenforceable after a foreclosure sale on a property tax lien. Because of that fact, most mortgage lenders will not allow a property tax foreclosure to proceed. Instead, the mortgage lender will pay off the property tax lien before the foreclosure sale actually occurs.
Income Tax Liens
Unlike property tax, IRS and state income tax liens don't have automatic priority over mortgage liens. Instead, income tax liens take priority as of the date the lien attaches to the property. As long as the mortgage lien attached to the property before the income tax lien, the mortgage lien has priority, which means the mortgage lien will remain attached to the property even after the foreclosure sale. Determination of priority on income tax lien foreclosures therefore requires a close examination of the title to the property in order to determine which lien attached first.
- "Foreclosure Law 101: The TextVook"; Dr. Vook Ph.D.; 2011
- "Real Estate Finance Law"; Grant S. Nelson, et al.; 2008
The Constitution Guru has worked as a writer and editor for "BYU Law Review" and "BYU Journal of Public Law." He is an experienced attorney with a law degree and a B.A. degree in history with an emphasis on U.S. Constitutional history, both earned at Brigham Young University.