north houston irs tax lien

Liability for Prior Real Estate Owner’s Unpaid IRS Taxes

You have to be diligent if you buy real estate from someone who owes unpaid taxes to the IRS. There are instances where the IRS can collect the prior owner’s taxes from you as the purchaser of the property. The recent Shirehampton Drive Trust v. JP Morgan Chase Bank, No. 2:16-cv-02276 (D. Nev. 2019) provides an example of this.

Facts & Procedural History

This case involves real property. The owner obtained a mortgage to purchase the property. The owner then failed to pay her monthly homeowner’s association (“HOA”) dues. The HOA foreclosed on the property.

The plaintiff in the case is a trust that purchased property from the foreclosure sale. It sued the bank to quiet title to the real property. The bank filed a counter claim on the same grounds.

The IRS removed the case to Federal court and filed a counter claim asserting that it had a superior lien stemming from the prior owner’s unpaid Federal taxes.

The court had to decide who had a superior interest in the property–the new purchaser, the bank, or the IRS.

IRS Liens, Generally

The IRS lien arises by operation of law when a tax is assessed. The term “assessed” refers to the process of recording the tax debt on the IRS’s books.

Once assessed, the lien gives the IRS an interest in the taxpayer’s property. This includes real estate the taxpayer owns.

The IRS lien is not valid against purchasers who pay full value for property if the third party does not know of the IRS lien. The IRS lien is generally not known until the IRS files a lien notice in the local county records.

When it comes to the filing of non-tax liens, such as mortgages or judgment creditors, the general “first in time, first in right” rule applies. This rule looks to the timing of when the liens were filed to determine which lien is superior.

The IRS Lien vs. the HOA Lien

This case turned on whether the HOA or IRS lien was superior. The plaintiff argued that the HOA lien was superior. If correct, that would mean that the plaintiff acquired superior title when it purchased the property from the foreclosure sale.

The IRS argued that the HOA lien wasn’t perfected prior to the time the IRS lien was filed. Under state law, the HOA lien would not arise until after the HOA sent the owner notice of the delinquent assessment.

The delinquent assessment was sent on  July 24, 2009. The IRS lien was filed one month prior to this on May 1, 2009. Thus, the court held that the IRS lien was superior to the HOA lien.

The effect was that the plaintiff who purchased the property in foreclosure did so subject to the IRS lien. The court allowed the IRS to enforce its liens against the new owner.

This situation may have been avoided if the purchaser hired a tax attorney in advance. The nominal cost could have potentially saved thousands of dollars and allowed them to purchase some other property.

But this may have resulted from the nonjudicial foreclosure process. The property may have been subject to an auction which did not afford buyers opportunity to perform their due diligence on the properties. This is one of the risks of purchasing property in this manner.

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