Does a Tax Lien Take Priority Over a Mortgage?

by Amanda McMullen
Tax lien foreclosures sometimes eliminate mortgage liens on the property.

If you have a lien on your property, you cannot sell it without paying the lien's holder. However, if the sale price of your home doesn't cover the cost of all the liens on your home, you must pay the liens with the highest priority first. Though the home's mortgage usually has the highest priority, tax liens may outrank the mortgage in certain circumstances.

Federal Tax Liens

When you fail to pay taxes you owe to the Internal Revenue Service, the IRS may impose a lien on your personal or real property, including property that is currently under a mortgage. According to the IRS, a federal income tax lien cannot take priority over any other lien imposed on the same property unless the IRS files a Notice of Federal Tax Lien (NFTL). After the IRS files an NFTL, the tax lien usually takes priority over liens filed later, but it doesn't take priority over previously-filed liens. Thus, if your mortgage was in place before the NFTL, the mortgage takes priority.

State Tax Liens

State tax liens may result if you fail to pay state income tax, excise tax or sales tax. As with a federal tax lien, the state taxing authority must file a formal notice of the lien to establish its priority, and it can exercise the lien against any personal or real property the debtor owns. Liens filed before the state tax lien will take priority over it, and liens filed afterward will usually be subordinate. In such cases, a mortgage will take priority as long as you obtained it before the state filed its lien.

Property Tax Liens

Local taxing authorities impose property tax liens when you fail to pay the tax assessed on your real property. Unlike federal and state tax liens, a property tax lien affects only the property that accrued the tax. Also, unlike other tax liens, a property tax lien gains immediate priority over all other liens against the property, including the mortgage and any federal or state tax liens already recorded.

Considerations

Because a federal or state tax lien will have priority over a mortgage if the tax lien exists first, most lenders require you to resolve all liens before they will approve your mortgage application. Likewise, because a property tax lien outranks an existing mortgage, many lenders require borrowers to pay property taxes into an escrow account so that no such lien will ever exist.

About the Author

Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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