– I owe more than my house is worth, and the IRS has also put liens on it. Can I still do a short sale?
– I want to bid on a house at a foreclosure auction, and it has IRS liens, do they disappear like all the other liens?
These, and other similar questions, are very important to consider if you are buying or selling your home in a short sale transaction, or bidding for a home at auction.
In general, the priority of a lien against real property follows the rule of “first in time, first in right”. What this means is that when you get a mortgage and then later get a home equity line of credit and then later get a home improvement loan, generally they will be paid off in that order. First, the mortgage gets paid, then the equity line, then (if any money is left) the improvement loan.
There are some exceptions. One is called a mechanic’s lien, which is not usually from a mechanic at all, but rather comes from a workman or contractor who is doing work for you. The “mechanic” has a number of interesting rules he must follow, and then they can “perfect” the lien; and the date of the lien is related to when work was started, not when he sent you the bill. So even though it might have been recorded after another lien, the priority is established earlier, when the work was started.
Another exception is property taxes. In Arizona and many other states, the statutes are written so that the property taxes for the specific property become a lien on January 1st of each year; however they also are granted first position, ahead of all other liens (There may be some esoteric exceptions.) Further, there is no recording requirement, but there is for all other liens.
What about an IRS tax lien? It is no different than any other lien, in that it must follow the “first in time, first in right” rule, however there are some notification requirements, and the IRS has some rights.
First, the IRS must be notified if a foreclosure proceeding is going to wipe out their lien. Then, after it is wiped out, they have 120 days to come back and buy the property themselves (They must reimburse what was paid for it). This is in the case of a foreclosure. What about a short sale? In a short sale, the IRS will sometimes release the lien so the short sale can proceed, especially if they can see that there is insufficient equity in the property to get anything. There is no advantage to them, to hold up the sale, and they would be wiped out in a foreclosure anyway.
So how do you get them to release the lien? Paperwork, of course. The instructions are on IRS form 783.
Disclaimer: I am not an attorney, although I think I saw one once. Consult with your attorney and CPA before making any important decisions relating to your finances.