Q: If the current seller was awarded the property in a divorce proceeding, do we need to worry about a federal tax lien recorded against the ex-spouse post-divorce?
A: The answer will depend on what steps were taken after the divorce to provide notice to creditors and the characterization of the subject property as set forth in the divorce decree.
Background: The character of the property refers to its classification as community property or separate property. Separate property is property of a spouse owned or claimed before marriage, or acquired afterwards by gift, devise or descent. There is a presumption that property possessed by either spouse during or on dissolution of marriage is community property. This should be indicated in the divorce decree.
Generally speaking, a deed between the spouses or certified copies of the divorce decree should be filed of record to provide notice to creditors. It has been held that a divorce decree that has not been recorded in the real property records does not constitute sufficient notice to creditors and involuntary liens filed against the divested spouse will cloud title to the property in the hands of the spouse to whom it was awarded.
Scenario: Divorce Decree lists subject property as community property, awards property to current seller and no deed/certified copies filed of record
If the federal tax lien is filed of record against the ex-spouse in this scenario, the lien will need to be released at or prior to closing. A federal tax lien attaches to the community property interest of a spouse. The ex-spouse was divested of this interest, but since the creditor was not provided notice of this divestiture, the lien will cloud title. Certified copies of the divorce decree or a deed from the ex-spouse should be filed of record as well.
Scenario: Divorce Decree confirms subject property is separate property of current seller and no deed/certified copies filed of record
A federal tax lien does not attach to the separate property of the other spouse (here our current seller). However, since the creditor was not provided notice, this could still pose a problem. For example, the IRS Notice of Lien against the ex-spouse could contain the property address for the subject property that was confirmed as the separate property of the seller. In order to clarify whether this lien attaches to the property the parties should seek a Certificate of Non-Attachment of Federal Tax Lien (requiring a release or partial release will only lead to unnecessary delays as the IRS will likely not acquiesce). IRS Publication 1024 details the information that the parties should provide and allows the parties to submit additional information, like a divorce decree. The Certificate of Non-Attachment of Federal Tax Lien, certified copies of the divorce decree or a deed from the ex-spouse should be filed of record.
Scenario: Property is community/separate property and deed/certified copies were filed of record
Regardless of the characterization of the property, filing certified copies of the divorce decree awarding the property to the current seller, will thereafter preclude any liens against the ex-spouse from attaching to the subject property.