Taxation & Estate Planning

Tax liens on real estate: Filed where I live or where my property is located?

By howardlevy

Here is a situation from a reader showing why location counts when it comes to Federal tax lien filings:  

The IRS has filed a tax lien against me where I live in Hamilton County, Ohio.  But I own real estate in North Carolina, and there are no tax liens filed against me there.  Does the IRS have to file a lien in the county where I live or where I own property for it be effective?

A federal tax lien is only effective against your property if it is filed in the proper place.  

If you own real estate, the IRS must file their Federal tax lien in the county where the real estate is located.  If the IRS files a lien in the correct county – where the rental property is located - that lien encumbers the property in a manner similar to your mortgage.  

Your place of residence is irrelevant to the effectiveness of a tax lien against real estate.

In your situation, the IRS filed their lien where you live, not where the real estate is located.  This means that if you have $50,000 of equity in the property, you can sell or refinance it without the direct interferenc of the lien.  The IRS is not secured on the property as the lien is filed in the wrong county.

The IRS may not know you have the property.  Depending on where you are in the collection process, it is possible they only know where you live.  That likely explains why the lien is filed in the wrong place.

I do recommend caution in how you use the property and any equity. 

The IRS may consider accessing and spending the equity to sources other than the government to be a case of dissipating assets.  A dissipated asset is one that has been sold, transferred or spent in a way that is detrimental to paying the IRS.  It depends on the facts and circumstances – for example, using the equity to pay reasonable living expenses is different than giving it to a friend to hold.  In an offer in compromise, the IRS can include dissipated equity - money you no longer have – in the settlement.     

The filing of a tax lien in the wrong county can be to your benefit.  But it is important to handle the situation properly so as not to give the IRS a claim of dissipating assets.

Full post as published by IRS and the Law on February 28, 2010 (boomark / email).