How do state and federal liens interact, and which lien has priority?

When a creditor—state or federal—places a lien on your property, that claim attaches to the property and can block sales, refinancing, or encumber equity. Determining which lien gets paid first (priority) comes down to timing, local recording laws, and a few special federal rules.

Below I explain how these liens arise, how priority is decided in common situations (including sales and bankruptcy), and practical steps to resolve or negotiate competing claims. In my work helping taxpayers and small business owners, the single most useful early step is obtaining a current lien search and the IRS’s lien transcript; that clarifies dates and who has the upper hand.

How liens are created and perfected

  • Federal tax liens: A federal tax lien arises by operation of law when the IRS assesses a tax and the taxpayer neglects or refuses to pay (26 U.S.C. §6321). The lien becomes effective as of the assessment date, but it generally does not bind third parties until the IRS files a Notice of Federal Tax Lien (NFTL) in the appropriate state or local recording office. The IRS explains the NFTL process and how it affects third parties on its Notice of Federal Tax Lien page (IRS).

  • State tax and judgment liens: States create liens through tax statutes, court judgments, or other statutory mechanisms. Many state liens are perfected by recording in county land records or by docketing judgments. Each state sets the rules for how and when those liens become enforceable and how they are indexed against real property.

The practical takeaway: a federal lien exists from the date of assessment, but for priority against most third parties the date the NFTL is filed matters. For other creditors, the date of their lien’s recording or perfection under state law typically controls.

Priority basics: first in time, first in right (with exceptions)

The usual rule for lien priority is chronological: earlier-recorded or otherwise perfected liens generally have priority over later ones. That rule applies to competing private creditors and state claims in most situations.

However, special rules and exceptions can change the outcome:

  • Federal statutory priority rules: Federal tax liens are governed by 26 U.S.C. §6323 for their validity against purchasers, holders of security interests, and judgment lien creditors. If the NFTL is filed before another party acquires an interest, the federal lien will have priority over that later interest.

  • Protected interests: Certain creditors (e.g., a bona fide purchaser for value without notice) or prior mortgage holders who recorded earlier generally keep priority over later tax liens.

  • State statutory priorities and carve-outs: Some state laws create liens that are given priority by statute (for example, certain municipal assessments or statutory landlord liens). The interplay between these state priorities and a federal tax lien can be complicated and sometimes requires litigation or negotiation.

  • Bankruptcy: In bankruptcy, lien priority is generally determined under applicable nonbankruptcy law (state law), but the bankruptcy process affects how secured claims are treated and whether lien strip or avoidance is possible. Federal tax liens usually survive bankruptcy, but whether they attach to post-petition property or how they are treated in plan distributions depends on chapter and timing. Consult a bankruptcy attorney for case-specific guidance.

Authoritative reference: see IRS guidance on federal tax liens and 26 U.S.C. §§6321–6323 for the statutory framework.

Common scenarios and how priority plays out

1) Sale of real property

If you sell property subject to competing liens, the sale closing will typically satisfy liens in order of priority from the proceeds. For example, an earlier-recorded mortgage and a prior judgment lien recorded before an NFTL will usually be paid ahead of a later-filed federal tax lien. Conversely, if an NFTL was recorded before a subsequent mortgage or mechanic’s lien, the IRS claim must be satisfied or subordinated for the later claimant to be paid.

For detailed guidance on how a federal tax lien affects sale or refinance transactions see our guide: How a Federal Tax Lien Affects Your Ability to Sell Property or Refinance.

2) Multiple tax liens (state and federal)

Where both state and federal tax liens exist, priority depends on the date each lien attached and whether the federal notice was filed before or after the state lien’s perfection. In many cases a state lien recorded before the federal NFTL will take priority; where the federal NFTL predated the state action, the federal lien will have the upper hand.

3) Bankruptcy and lien survival

Federal tax liens typically survive bankruptcy and remain attached to the taxpayer’s property post-bankruptcy unless avoided by operation of the Bankruptcy Code. Priority in distribution follows secured claim order; again, the underlying perfection date matters.

4) Wage garnishment, levies, and other collection tools

Liens are separate from levies and garnishments. A lien is a claim on property; a levy is the IRS’s legal seizure of property to satisfy tax debt. Priority rules for levies are different because a levy reaches property directly rather than depending on the order of recording.

How to resolve competing state and federal liens

Options depend on the parties involved and lien priority:

  • Pay the tax in full: The IRS will release the NFTL after full payment. The IRS’s guides on release, withdrawal, and subordination explain procedures and eligibility.

  • Request a withdrawal of the NFTL: Under specific circumstances (e.g., full payment via an installment agreement where withdrawal is appropriate), the IRS may withdraw a filed NFTL. Our article on how tax liens affect credit and steps to request a withdrawal explains the process and criteria.

  • Subordination or partial release: The IRS may agree to subordinate its lien to allow a borrower to refinance or sell; it may also issue partial releases for specific transactions. The IRS considers subordination when it increases likelihood of collection (see IRS lien subordination guidance).

  • Offer in compromise or installment agreements: These can resolve tax debt and lead to lien release when conditions are satisfied.

  • Litigation or negotiated settlements with state authorities: Sometimes the state will negotiate release or satisfaction of its lien, especially where federal priority is clear and the state’s practical recovery will be low.

For a step-by-step look at options after an IRS filing, see Options When the IRS Files a Notice of Federal Tax Lien.

Practical checklist if you discover competing liens

  1. Obtain a certified lien search and IRS transcript to confirm assessment and filing dates.
  2. Order a title report to see recorded mortgages and judgments.
  3. Compare dates: the earlier perfected/recorded interest usually controls priority.
  4. Contact the IRS and state lienholders promptly to discuss payment plans, subordination, or partial releases.
  5. Consider short-term funding (bridge loans) only after confirming priority and negotiation outcomes.
  6. If you’re in bankruptcy, immediately notify your attorney and trustee—timing matters.

In my practice, early transparency and a clear title chain often prevent surprises at closing. Lenders and title companies also play a critical role in flagging priority issues before a sale completes.

Examples (short)

  • Example A: A homeowner had a mortgage recorded in 2015, a state tax lien recorded in 2019, and the IRS filed an NFTL in 2021. At closing the mortgage and state lien would likely be paid before the IRS if both state lien and mortgage were recorded prior to the NFTL. However, if the NFTL preceded the state lien, the IRS claim would be senior to the state claim.

  • Example B: A small business owner negotiated a subordination with the IRS so a bank could refinance equipment. The IRS agreed because the refinance increased the business’s ability to pay the federal tax liability—this is an example where negotiation, not automatic priority law, solved the problem.

FAQs (brief)

Q: Can a federal lien override a previously recorded state lien?
A: Generally no—priority is based on earlier perfection or recording—unless a specific federal statute or court order says otherwise. The dates of assessment, recording, and perfection are the keys.

Q: Does paying a state lien remove the IRS lien?
A: Paying a state lien satisfies that particular claim but does not affect an independent federal tax lien. The IRS lien must be addressed separately.

Q: Will a lien forever prevent selling my home?
A: Not necessarily. Many liens can be negotiated, subordinated, released, or paid at closing so that the sale can proceed. See our guide on resolving tax liens and subordination for options.

Professional tips

  • Don’t assume federal always trumps state; look at recording and perfection dates.
  • Pull an IRS Account Transcript (Collection Activity) to confirm assessment and NFTL filing dates. This is often decisive in priority disputes.
  • Use an experienced title company during sale/refinance to spot hidden encumbrances early.

Sources and further reading

Internal resources

Professional disclaimer: This article is educational and does not constitute legal or tax advice. Specific outcomes depend on facts, timing, and jurisdiction. Consult a tax attorney, CPA, or licensed professional for case-specific advice.