Texas Homestead Exemption Helps the IRS Collect Tax Debts (2024)

Unlike the exemption available in most other states, the Texas homestead exemption has no dollar limit. Texans can feel secure in their homes even if they have unpaid debts owed to third parties.

There is a common misconception that this law prevents the IRS from seizing homes in Texas. The IRS’s ability to collect is not constrained by the Texas homestead exemption. In fact, the homestead exemption may make it easier for the IRS to collect from Texans.

The court addresses this in United States. v. Cobos, No. 3:13-CV-4924-L (N.D. Tex. 2017). The case involves a third party who had a claim to the taxpayer’s house. The question for the court was whether the third party or the IRS had priority to satisfy their debts by taking the house.

Facts and Procedural History

The taxpayer owed back taxes to the IRS. The tax debt was for the years 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 he 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 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 unique to the IRS.

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. This unlimited homestead exemption is unique to Texas.

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. Put another way, the Texas homestead exemption prevented Williams from perfecting his lien.

The IRS lien was not limited by the Texas homestead exemption. The IRS lien 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.

Clearly, this was not the Texas legislator’s intent in enacting its very generous unlimited homestead exemption. If the homestead exemption was limited to a certain dollar amount as in many other states, then Williams’ lien may have attached to the property. This would have given Williams priority over the IRS lien in this case.

Final Thoughts on the Homestead Exemption

Those with IRS debts should not hope to rely on the Texas homestead exemption. While the Texas homestead exemption can benefit those who get behind on their debts, it provides no protection for IRS debts. The IRS can seize or levy on homes in Texas. As described in this article, the Texas homestead exemption may make it easier for the IRS to collect by preventing others from having a superior interest in the taxpayer’s property.

If you owe the IRS back taxes, you should contact one of our experienced Houston tax attorneys.