Tax lien priority decides who gets paid first when a property owner owes the IRS, a state revenue agency, and a local government at the same time. The default rule is “first in time, first in right,” but the lien has to be fully perfected (what courts call “choate”) to hold its place in line, and Congress carved out a federal super priority that pushes local property tax liens to the front regardless of when they arose. Those two ideas do most of the work in every priority dispute.
The First-in-Time Rule and What “Choate” Means
Whoever perfects a lien first generally gets paid first out of a debtor’s property. But a lien only counts for priority once it is choate. The Supreme Court set the test in United States v. City of New Britain: a lien is choate when the identity of the lienholder, the specific property subject to the lien, and the exact dollar amount of the debt are all fixed.1Legal Information Institute. United States v. City of New Britain, 347 US 81 Until all three are locked in, the lien is “inchoate” and loses to any competing lien that has already met the test.
This is a federal standard, and it applies the same way no matter what a state statute says about its own lien’s priority. A state cannot leapfrog the federal lien by declaring its claim “superior” if the amount owed had not yet been pinned down when the federal lien arose. Under the choateness test, the state’s lien did not exist yet in the sense that matters for priority.
When property is eventually sold, proceeds flow to the oldest choate lienholder first. Whatever remains passes to the next, and so on until the money runs out. Creditors at the bottom of the stack can end up with nothing.
When the Federal Lien Attaches and When It Binds Others
A federal tax lien is born automatically once the IRS assesses a tax liability, sends a demand for payment, and the taxpayer fails to pay.2Office of the Law Revision Counsel. 26 USC 6321 – Lien for Taxes At that moment it attaches to everything the taxpayer owns or has rights to, including real estate, vehicles, bank accounts, and future income. No public filing is required for that attachment, and the lien’s effective date relates back to the assessment date.3Office of the Law Revision Counsel. 26 USC 6322 – Period of Lien
Against outsiders, though, the story changes. Until the IRS files a Notice of Federal Tax Lien in the appropriate recording office, the lien is not valid against purchasers, holders of security interests, mechanic’s lienors, or judgment lien creditors.4Office of the Law Revision Counsel. 26 USC 6323 – Validity and Priority Against Certain Persons A lender that records a mortgage before the IRS files its notice takes priority. A buyer who purchases the property without knowledge of the lien, before the notice is filed, takes free of the federal claim. Once the notice is on record, the federal lien locks in against everyone who comes after.
That gap between assessment and filing is where a lot of priority disputes are decided. Title searches and lien searches before closing are the tool that keeps buyers and lenders on the safe side of it.
Why Local Property Tax Liens Come First
Local property tax liens sit in a category of their own. Federal law provides that a lien for a property tax of general application based on the property’s value takes priority over a federal tax lien, even one filed years earlier, as long as local law gives the property tax lien priority over prior security interests.4Office of the Law Revision Counsel. 26 USC 6323 – Validity and Priority Against Certain Persons The same rule covers special assessments for public improvements and charges for government-provided utilities.
The reasoning is practical. Local governments fund schools, fire departments, and road maintenance through property taxes, and a single delinquent taxpayer could starve a municipality of the revenue tied to a parcel if federal claims always jumped the line. Congress decided property-based local revenue should not depend on whether the IRS filed first.
The nuance to catch is that the super priority comes from federal law, not from state or local law alone. A state statute declaring its tax lien has “super priority” does not automatically make it so for federal purposes.5Internal Revenue Service. IRS Chief Counsel Advice 200922049 The lien must fit within the federal categories: taxes based on property value, special assessments for public improvements, or utility charges. A state income tax lien does not qualify. It competes under the ordinary first-in-time, choateness-based rules like any other claim.
The practical effect is that a small unpaid property tax bill can push much larger, older federal and state claims further back in line. At a tax sale, local property taxes come off the top before any remaining funds flow to other creditors. A lender holding a mortgage on property with delinquent local taxes should treat the delinquency as an immediate threat to its recovery, not a routine problem.
Where State Tax Liens Fit
States impose liens for unpaid income, sales, and business taxes under their own statutory frameworks. When a state lien competes with a federal lien, federal law controls the outcome, and the choateness test decides it. If the state lien was fully choate before the federal lien arose, the state lien takes priority.5Internal Revenue Service. IRS Chief Counsel Advice 200922049 If it was not, the federal lien wins regardless of what the state’s own statutes say about priority order.
Recording rules vary by state. Some create automatic liens upon assessment along the federal model; others require a formal filing before the lien attaches. The controlling question is always whether the state’s lien was choate under the federal standard by the time the federal lien came into existence. States that assess and record quickly after a tax becomes delinquent are the ones most likely to hold priority when a federal claim arrives later.
When a taxpayer owes both state and federal taxes and lacks assets to cover both, the timing of each lien’s perfection decides who is paid and who is not.
Other Interests That Beat a Filed Federal Lien
Filing a Notice of Federal Tax Lien does not make the IRS unbeatable. Congress identified ten categories of interests that take priority over the federal lien even after notice has been filed.4Office of the Law Revision Counsel. 26 USC 6323 – Validity and Priority Against Certain Persons Beyond the local property tax super priority already covered, the ones most likely to matter in a property or commercial dispute include:
- Mechanic’s liens on an owner-occupied home of four units or fewer, where a contractor repaired or improved the residence and the contract price stays within the statutory cap (adjusted for inflation from a $5,000 base).
- Attorney’s liens on a judgment or settlement, to the extent of reasonable fees for obtaining that judgment or settlement, when local law recognizes the lien.
- Retail and casual sale purchasers who buy personal property in the ordinary course of a seller’s business, or buy household goods below the statutory threshold, without actual knowledge of the federal lien.
- Possessory liens held by a repair shop that keeps continuous possession of the personal property under local law until the repair charges are paid.
- Purchasers of securities and lenders taking a security interest in securities, if they had no actual knowledge of the federal lien at the time of purchase.
These carve-outs let ordinary commercial activity continue without every buyer or repair shop having to run a federal lien search. Each has narrow conditions, and a claim that misses a condition falls back into ordinary priority order.
How Priority Plays Out at Foreclosure
Foreclosure is where these rules stop being abstract. When a senior lienholder forecloses, junior liens are generally wiped out by the sale, but only if the junior lienholder was properly named as a party. A junior lienholder not joined in the action keeps its lien on the property after the sale.
Foreclosing against property that carries a federal tax lien adds requirements. The federal government has consented to be named as a party in foreclosure actions, but the sale must be a judicial sale.6Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien When a senior lienholder forecloses and sells the property to satisfy a lien ahead of the federal claim, the federal government has a redemption period of 120 days from the date of sale, or the period allowed by state law, whichever is longer. During that window, the government can buy the property back by matching the sale price.
When the federal lien is the senior lien and a junior creditor forces a sale, the sale happens subject to the federal lien. The buyer takes the property with the IRS lien still attached unless the government consents to a sale free of its lien with proceeds distributed by priority.
For municipal property tax foreclosures, the local government’s super priority means its lien is satisfied first out of sale proceeds. The federal redemption right still applies if the government was joined in the action, so buyers at municipal tax sales should factor that possibility into their bids.
Putting the Order Together
For property carrying overlapping tax claims, the practical priority stack usually looks like this. Local property taxes and qualifying special assessments come first, ahead even of earlier-filed federal and state liens, because federal law hands them that position. After that, remaining liens fight over what is left under first-in-time, first-in-right, with each lien’s place decided by when it became choate. Federal tax liens hold their assessment-date position against the taxpayer but only bind buyers, lenders, mechanic’s lienors, and judgment creditors from the date the Notice of Federal Tax Lien is filed. State tax liens compete on the same choateness standard, no matter how their own statutes describe them. And even after the federal notice is filed, a handful of specific interests (owner-occupied home repairs, attorney’s fees on the judgment they secured, ordinary retail purchases, possessory repair liens, and certain securities transactions) still cut in front. Getting the order right is the difference between full recovery and walking away with nothing.