The $244,000 Mistake – The Importance of Title Searches During a Divorce

In many divorce cases, the necessity of a Title Search on the family home that is to be involved in the divorce is often overlooked. Some legal professionals rely upon the standard of ‘the appraisal minus the mortgage equals the equity’ and that is not a great assumption.

When people are purchasing a home in Arizona it is the title and escrow company that will perform a title search to ensure there are no challenges with the title of the property, so the title can convey without encumbrances to the new owner.

Sometimes the title company will find a problem with the title and this is called a ’cloud on the title’ and the ‘cloud’  must be removed before the transaction can move forward. In some cases, the ‘cloud on the title’ prevents the sale of the property from closing because the title cannot be conveyed to the new owner with the cloud on the title, and the existing owner does not have the money to remove the ‘cloud.’

One of the most common clouds on a title is a tax lien or multiple tax liens. Tax liens always take the first position in the hierarchy of liens on the title of a property. If you have no tax liens on the property, but a mortgage the hierarchy of liens on a title will be: (first position) 1st Mortgage, (second position) 2nd Mortgage/Home Equity Line of Credit (HELOC) if there is one.

If there are mortgages and tax liens on the property the tax liens will move into the first position in the hierarchy of liens, in front of the mortgage(s) because real property is one of the ways the government will collect their money if they are owed back taxes. With this in mind, if there are tax liens the lien hierarchy on the house will be as follows:  Income tax lien (first position), property tax lien (second position), 1st Mortgage (3rd position), 2nd Mortgage (4th position), etc.

In order for a house to convey to a new owner, all of the liens (encumbrances) on a house must be cleared and the property must not have any clouds on the title.

We know of a case where a man and woman were divorcing. The woman owned a company on her own and had not paid income taxes for several years. This tax debt rose to $244,000. The soon to be ex-husband did not know about the tax debt, nor did he know that a tax lien had been placed on the family home due to the tax debt.

The man was awarded the house in the divorce and with that, he also took on the tax-lien encumbrance because the tax lien was placed on the house. How did this happen and why did the man and his attorney not know about the tax lien situation? They did not do a title search on the home. The title search would have revealed the tax lien and any other “clouds’ on the title of the house.

If you or someone you know is contemplating or going through a divorce let us help you understand this and many other situations to consider with the marital home.