Extinguish Tax Lien for a Foreclosure on a First Mortgage

A mortgage foreclosure can be a very complicated matter for the lender, the borrower and any other parties that may be involved. In a simple mortgage foreclosure, the other parties involved will be the lender and the borrower. The lender is usually a bank or other financial institution. In some situations, there may be a tax lien on the property. The tax lien may be from the IRS for money owed the government, a state tax lien for fines and fees owed or a county lien for delinquent property taxes. In situations like this, the question regarding the ability to extinguish a tax lien by foreclosure on a first mortgage has always risen.

In certain states the law varies regarding the right to extinguish tax liens with foreclosure on a first mortgage. These laws may be affected by the type of foreclosure sale it is. It is also depends on the type of tax lien that’s on the property. There are certain circumstances where the lender can extinguish tax liens with foreclosures on a first mortgage. This is particularly true with tax liens from the county or state. Liens by the Internal Revenue Service may or may not be extinguished depending on certain situations, mostly what type of notice they are given regarding the impending foreclosure.

In most states, a mortgage is a lien that takes precedence over any other liens that may be put on the place. But, this does not mean that it can extinguish tax liens. Foreclosures of first mortgage must take place in a legal manner, by proper notification to the other lien holders. Banks cannot automatically extinguish tax lien with foreclosure of first mortgage if there are ad valorem liens, federal tax liens or Uniform Commercial Code financial statements against the property. For instance, in the state of Alabama, the IRS requires at least 25 days notice of a mortgage foreclosure if they have a lien on the property.

In this case of the tax liens being extinguished, the IRS continues to have the right to redeem the property within 120 days of the sale date if the bank extinguished the tax liens. They also can maintain their tax liens on any excess of the proceeds after the bank gets what’s owed to them.

There have been cases that have been taken into court to battle the question of extinguished tax lien with foreclosure first mortgage sales. This often also happens in the case of delinquent property taxes where parcels of land are sold at bid, yet the lender still holds the title to the property. Always check your state laws to be sure of the laws regarding mortgage foreclosures and junior liens.