– I owe more than my house is worth, and the IRS has placed liens on it too. 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 go away like all the other liens?
These and similar questions are very important to consider if you are buying or selling your home in a short sale transaction, or bidding on a home at auction.
In general, the priority of a lien on real property follows the “first in time, first in right” rule. What this means is that when you get a mortgage and then you get a home equity line of credit and then you get a home improvement loan, they will generally be paid in that order. First, the mortgage is paid off, then the equity line, then (if there is any money left over) the improvement loan.
There are some exceptions. One is called a mechanic’s lien, which is usually not from a mechanic at all, but instead comes from a worker or contractor who is working for you. The “mechanic” has a series of interesting rules that he must follow, and then he can “perfect” the link; and the link date is related to when the job started, not when the invoice was sent to you. So even though it was registered after another link, the priority is set before, when the job was started.
Another exception is property taxes. In Arizona and many other states, statutes are written so that property taxes for the specified property become a lien on January 1 of each year; however, they are also given the top position, ahead of all other encumbrances (there may be some esoteric exceptions). Also, there is no registration requirement, but there is for all other liens.
What about an IRS tax link? It is no different than any other link in that you must follow the “first in time, first in right” rule, however, there are some notice requirements and the IRS has some rights.
First, the IRS must be notified if a foreclosure proceeding is going to remove your bond. Then, after it is removed, they have 120 days to come back and buy the property themselves (they must pay 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 isn’t enough equity in the property to get anything. There is no advantage to them, delaying the sale, and they would be wiped out in foreclosure anyway.
So how do you get them to release the link? Paperwork, of course. Instructions are on IRS Form 783.
Disclaimer: I’m not a lawyer, although I think I saw an ounce. Consult with your attorney and CPA before making any important financial decisions. For more information, go to http://www.AZShortSales.biz