Texas Property Tax Loans vs. the Federal Tax Lien: Who Gets Paid First

Texas property taxes are a lien on the property. When they go unpaid, penalties and interest pile up quickly, and the taxing units can eventually foreclose. Texas also has an industry of property tax lenders who pay the taxes for the owner and take over the tax lien. Add a federal tax lien to that picture and the questions get sharp: who has priority, and what happens to the IRS's claim if the house is sold?

This guide covers the federal side. The Texas rules on property tax lenders and tax foreclosures are state law, and the details matter. Confirm them with a Texas attorney who practices in that area before signing a property tax loan or responding to a tax suit.

Property taxes beat the federal tax lien

Normally, the federal tax lien's priority depends on timing: who filed or perfected first. IRC 6323(b) lists exceptions, interests that beat the federal tax lien even if the notice of federal tax lien was filed first.

IRC 6323(b)(6) is one of them. A lien on real property securing a tax of general application levied based on the property's value, a special assessment for a public improvement, or charges for utilities or public services, has priority over the federal tax lien if local law gives it priority over earlier security interests. Texas property tax liens generally have that kind of priority under Texas law. So the county, school district, and city generally get paid ahead of the IRS from the property, regardless of when the IRS filed.

What a property tax lender does

As general information, Texas Tax Code section 32.06 allows a property owner to authorize a lender to pay the owner's delinquent or current property taxes, after which the taxing unit's lien is transferred to the lender. The lender is then repaid under a contract, often with interest and fees, and can foreclose if the owner defaults. The statute imposes notice, disclosure, and procedural requirements on these loans.

That makes the lender's priority question important. Does the transferred lien keep the county's superpriority over the federal tax lien?

Subrogation and the federal lien

IRC 6323(i)(2) addresses subrogation: where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, that person is subrogated to those rights for purposes of the federal tax lien. If Texas law puts the property tax lender in the taxing unit's shoes, the federal statute generally respects that.

The practical result is that a properly transferred Texas property tax lien will often keep its priority ahead of the IRS. But that conclusion depends on the transfer complying with Texas law and on the facts of the particular loan. A lender that did not follow the statute may be in a weaker position. That is a Texas-law determination.

For the homeowner, this means a property tax loan can push the IRS further back in line on your property. That matters if you are planning to sell, refinance, or offer the IRS your equity in a settlement.

Foreclosure: the IRS has to be included

A foreclosure does not wipe out the federal tax lien unless federal rules are followed.

If the foreclosure is a judicial proceeding, such as a tax suit by a taxing unit, the United States must generally be named as a party under 28 U.S.C. 2410 for the sale to affect the federal lien. If it is not named, the property generally remains subject to the federal tax lien after the sale.

If the foreclosure is nonjudicial, such as a lender's foreclosure under a deed of trust, IRC 7425(b) controls. If a notice of federal tax lien was filed more than 30 days before the sale, the foreclosing party must give the IRS written notice at least 25 days before the sale. Without proper notice, the sale does not discharge the federal lien, and the buyer takes the property still subject to it.

The IRS's right to redeem

Even when a foreclosure properly discharges the federal lien, the IRS can redeem the property. Under IRC 7425(d), after a nonjudicial sale the United States may redeem within 120 days, or within the redemption period allowed under local law if longer. For judicial sales, 28 U.S.C. 2410(c) provides a similar 120-day period for internal revenue liens, or the state-law period if longer.

The IRS rarely redeems residential property. But the right exists, and buyers at Texas tax sales sometimes discover it the hard way when a title company will not insure a property inside the redemption window.

What this means for a Texas homeowner who owes both

If you owe property taxes and the IRS, here is the order of operations I generally recommend thinking through:

• Keep property taxes current if you possibly can. Texas property tax penalties and interest are steep, and a tax foreclosure puts your home at risk far faster than the IRS usually does.
• Before signing a property tax loan, compare its total cost to an IRS-side solution. Sometimes paying the county and negotiating with the IRS is cheaper than borrowing to pay the county.
• Disclose property tax liens and loans accurately on any IRS collection information statement. They reduce your equity for an offer in compromise or installment agreement, because the IRS values assets at quick sale value minus liens with priority.
• If a tax suit names the United States, take it seriously. The IRS's lawyers will appear, and the outcome can affect how your equity is divided.
• If you are buying property at a tax sale, check for federal tax liens and whether the IRS was properly notified or joined.

My guides on deducting Texas property taxes, the federal tax lien on Texas property, and your Texas homestead cover the related pieces. The firm's tax lien page has more on lien release and withdrawal.

In Texas, the county stands at the front of the line, and whoever pays the county can stand there too. The IRS is used to waiting its turn on real estate. You should not wait to deal with either one. Let's talk: 813-229-7100.