April 27, 2020
FEDERAL TAX LIENS UNAFFECTED BY LOCAL FORECLOSURES, SOMETIMES…
The North Carolina Court of Appeals has established that in the absence of any notice to the federal government, foreclosure for any unpaid local taxes has no bearing or ability to extinguish federal tax liens.
Federal Tax Liens Unaffected by Local Foreclosures
North Carolina is what is known as a “pure race” state, meaning that the first lien holder or lender to record their claim to a property has precedent over any other claimants. This encourages stakeholder parties to record their interest as quickly as possible in order to secure their claim in the event of a foreclosure or tax lien.
However, the court’s ruling explicitly states that winning the race to be first recorded party “does not upset the rules of lien priority” as established by local and federal law — including cases where those rules conflict. In short, if a piece of property is obtained via foreclosure sale and the buyer does not notify the federal government, any pre-existing tax liens applied to the property are still in play.
Generally speaking, liens — encumbrances on a piece of property that are incurred by unpaid taxes or other fees — go in a straightforward order of restitution. If the property is sold, the first (or senior) lien must be paid in full before any remaining funds can be applied to subsequent, or junior, ones; when the profit is exhausted, all remaining liens are extinguished. The NC ruling means that if a property has both local and federal liens applied to it, the fulfillment of a senior local lien does not extinguish a junior federal one.
The solution for foreclosure buyers? Clear communication. The NC ruling clearly states that notice to the federal government is enough to fulfill the buyer’s obligation, so a foreclosure purchase pursuant to delinquent state taxes (and with notification) stands a fair chance of extinguishing often-substantial federal liens.
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