How to Handle Federal Income Tax Liens in North Carolina Foreclosures

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Sooner or later, lenders who regularly conduct foreclosures of real property in North Carolina will confront the problem of what to do with real property encumbered by a federal income tax lien. While foreclosures over federal income tax liens are not common, they appear to be increasing as property owners hit hard by the recession increasingly have trouble paying both their federal income tax liability and their mortgages. This alert explains the interaction of federal income tax liens with recorded security interests on real property. Federal tax liens for gift and estate taxes are treated differently, and are not discussed herein.

Under federal law, a federal income tax lien is subordinate to the lien created by the lender’s deed of trust if the deed of trust is recorded in the office of the register of deeds before the federal income tax lien is of record. 26 U.S.C. § 6323(a). Under North Carolina’s version of the Uniform Federal Lien Registration Act, the proper office for recording a federal income tax lien on real property in North Carolina is the clerk of superior court in the county which contains the property subject to the lien. N.C.G.S. § 44-68.12(b).

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