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Buyers Beware: Buying Real Estate Subject to Unpaid IRS Taxes

When purchasing real estate, it is important to be diligent in whether the seller owes unpaid taxes to the IRS. In certain situations, the IRS can collect prior owner’s taxes from you the buyer of the real estate, even though the seller incurred those taxes. A recent United States District Court, District of Nevada demonstrates this issue.

In the case of Shirehampton Drive Trust v. JP Morgan Chase Bank, No. 2:16-cv-02276 (D. Nev. 2019), the owner obtained a mortgage to purchase real estate property. The owner later fell behind and failed to pay their monthly homeowner’s association (HOA) dues, and the HOA recorded a notice of delinquent assessment lien on the property. The HOA then foreclosed on the property. Shirehampton Drive Trust (Shirehampton), the plaintiff, purchased the property from the foreclosure sale and sued JP Morgan Chase Bank (the bank) to quiet title to the real property, and the bank filed a counter claim on the same grounds. The IRS became involved as well and removed the case to Federal Court, filing a claim of its own on the grounds that the previous owner had outstanding unpaid Federal taxes.

Federal IRS Tax Liens arise by an operation of law when taxes are assessed. Once the IRS records the tax debt, it has an interest in the taxpayer’s property, which generally includes real estate. The IRS lien is generally made in the local county records and must be recorded to generally be valid.

The issue hung on which lien was superior, the IRS or the HOA lien. Generally, the “first in time, first in right” rule applies, looking to the timing of when the liens were filed. Shirehampton argued that the HOA lien was superior and thus they purchased the lien clear of the IRS Federal Tax Lien. The IRS argued the HOA lien wasn’t perfected before the Federal Tax Lien, as under Nevada state law, the HOA lien would not be perfected until after notice was sent to the owner of the delinquent assessment. The US District Court for the State of Nevada ruled for the IRS in that the IRS lien filed on May 1, 2009 was before the date the delinquent assessment was sent to the prior owner on July 24, 2009, even though the owner became delinquent of the HOA dues on March 1, 2009. As notice of the lien was not perfected in being sent to the previous property owner, the IRS’ lien was superior. Thus, Shirehampton purchased the property subject to the IRS’ lien and had to pay those unpaid taxes of the previous owner.

When dealing with tax issues and liens when buying property it is important to consult a tax attorney that can help you understand the consequences of liens encumbering the property, and not end up paying the unpaid taxes of the previous owner!