IRS Benefits from the Texas Homestead Exemption

In United States. v. Cobos, No. 3:13-CV-4924-L (N.D. Tex. 2017), the court addressed whether a third party who files a lien notice against a taxpayer before the IRS files its lien notice has a superior claim to the taxpayer’s home. The case highlights how the Texas homestead exemption can benefit the IRS to the detriment of other third party creditors.

Facts and Procedural History

The taxpayer owed back taxes to the IRS for 2005, 2006, 2007, 2008, and 2009.

The IRS filed a lien notice against the taxpayer on:

  • November 18, 2009 for the 2005 and 2006 tax years.
  • January 10, 2013 for the 2007 tax year.
  • September 25, 2012 for the 2008 tax year.
  • December 30, 2011 for the 2009 tax year.

Williams, a third party, obtained a judgment against the taxpayer and filed a lien against the taxpayer on February of 2009–nine months prior to the IRS’s first lien filing.

The taxpayer owned a home in Texas that the taxpayer resided in until December 29, 2009.

The IRS sued the taxpayer to foreclose its lien and obtain title to the home to satisfy the taxpayer’s unpaid tax debts. Williams claimed to have a superior lien.

The court had to decide whether the IRS or Williams had a superior lien. The outcome depended on the interplay between the IRS lien rules and the Texas homestead exemption.

The IRS’s Lien and Levy

A lien is like a post-it note that sticks to every item of property a debtor owns. The lien provides one avenue for creditors to take or levy on a debtor’s property.

Liens can arise by agreement (such as when someone grants a lien to a third party to borrow money) or by operation of law (such as when taxes are not paid, as described below). To be valid, the lien generally has to be filed in the public records. This typically has to be done before the creditor can successfully take or levy on property.

The IRS’s lien is different. The IRS does not have to file its lien notice in the public records in order for the IRS lien to be valid or before it levies on the taxpayer’s property. The IRS’s lien for unpaid taxes arises by operation of law if a tax is not paid after demand. This no-notice-required aspect of the IRS lien is one of the reasons why the IRS is often referred to as a “super creditor.”

The Texas Homestead Exemption

Most states provide some form of homestead protection. These laws generally prevent creditors from selling an individual’s home to satisfy the individual’s debts.

Texas is known for its generous homestead law. The Texas homestead law is found in the state’s constitution. It says that an individual’s homestead cannot be forcibly sold to pay the individual’s debts, except to pay:

  • The mortgage used to purchase or refinance the property.
  • Real estate taxes due on the property.
  • A loan used to pay off unpaid Federal taxes owed by the owner or, if the house is owned by a married couple, if the taxes are owed by both spouses.
  • Mechanics and materialman’s liens for constructing new improvements to the home or repair or renovate existing improvements if the work is contracted for in writing.
  • Certain loans secured by the home to the extent all loan balances for the home do not exceed 80 percent of the fair market value of the home at the time the loan is made.
  • A reverse mortgage.

Unlike most other states, there is no dollar limit on the amount that can be protected by this homestead exemption.

Federal Law Trumps State Law

The courts have made it clear that Federal law, such as the law that gives rise to the IRS lien, generally trumps state law. Thus, the Texas homestead exemption does not prevent the IRS from being able to take or levy on a taxpayer’s home. It does however prevent other creditors from being able to take or levy on a taxpayer’s home. This was the very issue in the Cobos case.

In Cobos, Williams had filed his lien against the taxpayer in February of 2009. Because the taxpayer was residing in the home during this time and continued to do so until December 29, 2009, Williams’ lien was not perfected until the taxpayer moved out of the house on December 29, 2009. The IRS lien was not limited by the Texas homestead exemption and it was able to attach and be perfected while Williams’ lien was held in abeyance. This gave the IRS a superior interest to the taxpayer’s home.

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