In general, a federal tax lien arises when three (3) conditions are met: (i) assessment, (ii) demand for payment from the IRS, and (iii) a refusal to pay by the taxpayer. If the taxpayer fails to pay after the IRS has made its demand, then 10 days later the lien becomes effective and attaches to all property that the taxpayer owns. However, the tax lien is not valid against third parties until notice of the lien is filed. Filing the lien perfects the lien against third parties.
The following case illustrates why it is very important to record the deed after you have purchased a parcel of real estate.
The IRS assessed tax liabilities against the Bacek’s on May 10, 2003, May 24, 2004, and May 23, 2005. These assessments caused federal tax liens to attach to the real property owned by the Bacek’s. On May 31, 2005, the Bacek’s sold a parcel of real estate known as 444 Prospect Street to Moco Investments.
The IRS filed notices of the federal tax liens as required by statute on December 7, 2005. Moco Investments filed its deed to the property that it had purchased with the Recorder of Deeds Office in January, 2006.
The Court held that the property owned by Moco Investments was subject to the tax lien of the Sellers. The Court stated that one of the purposes of the recording statutes is to ascertain the priority of the liens. In this case, if Moco Investments had recorded the deed at the time of the purchase (May 31, 2005), it would not have been liable for the sellers’ tax liens. The IRS argued that all Moco Investments had to do to be protected from the lien was to file the deed when it had purchased the property. In this case, Moco Investments did not record the deed until January, 2006, some eight months after the purchase, and after the IRS had filed notice of the tax lien. As the Court stated, the IRS “...filed the notice of the federal tax lien before [Moco Investments] became a purchaser. [Moco Investments] was not a purchaser until [Moco Investments] recorded the deed in January, 2006”. (Moco Investments LLC v United States, KTC 2008-52 (D.N.J. 2008)). Further, “Since an unrecorded deed is invalid against subsequent purchasers, and protection from federal tax liens requires a valid deed against subsequent purchasers, [Moco Investments] here is not protected from the perfected tax liens which encumbered the property prior to [Moco Investments] recording the deed” (See id.).
This case teaches why it is very important to record the deed after acquiring a piece of property. At times we have found that Buyers have received a deed and thought that because the deed had been signed by the Sellers that they did not have to do anything else. At other times, they simply forgot to record the document. As illustrated above, you should always ensure that your deeds are recorded promptly upon the purchase of any real estate to protect your interest.
If you have any questions regarding the recording of your deeds please feel free to contact our office.