Selling a home isn’t the easiest thing to do, and this process can become more complicated if your house is subject to a tax lien. A tax lien is a government interest in your property that attaches when you have unpaid taxes. The purpose of the lien is to protect the government’s interest in the property while it tries to collect the tax debt.

Despite how effective tax liens can be, it’s still possible to sell your home with a tax lien. It often requires the help of a tax relief lawyer who can walk you through the process. If you’re trying to sell your home that’s encumbered by a tax lien, contact Seattle Legal Services, PLLC for a free consultation. You can reach us using our online contact form or by calling 425-428-5262.

Key Takeaways

  • It’s possible to sell a home with a tax lien on it, but extra steps are needed before the sale.
  • Dealing with the tax lien before the sale may mean disputing the lien, obtaining a certificate of discharge, or making arrangements with the tax authority to resolve the tax debt.
  • Sale proceeds can be used to pay off some or all of the unpaid tax bill.
  • Notify the tax authority in advance of the sale if you have a payment plan in place.

Why It’s Harder to Sell Your Home With a Tax Lien

Selling a home subject to a tax lien reduces its marketability for several reasons:

  • Prospective buyers tend to shy away from properties connected to a government claim.
  • Additional paperwork could increase the closing costs.
  • The home may need to sell for a high enough price to pay off the lien, which may limit the buyer pool.
  • Lien must be addressed prior to closing, since title companies won’t transfer a title with a lien attached to it.

Is It Possible To Sell a Home Subject to a Tax Lien?

Selling residential property subject to a federal or state tax lien is possible. However, additional steps are needed before the sale can be completed. The exact steps depend on several variables, including how much equity you have in your home and how much you owe the IRS.

You Have Enough Equity to Pay Your Tax Debt

If you have equity in your home that exceeds what you owe the IRS, then selling a home with a tax lien won’t be that different from a regular home sale. The biggest difference is that before you get your share of the sale proceeds, your tax bill with the IRS or other tax entity holding the lien gets paid off first. After that, the lien will be released by the IRS, meaning you don’t owe it anymore.

You Owe the IRS More Than the Equity in Your Home

Even if your tax liability exceeds the equity in your home (or you have no equity at all), the IRS will often agree to remove the lien to allow the sale to go through. There are several reasons that the IRS agrees to this:

  • There’s no reason for the IRS to have a lien on property that can’t be used to pay off your tax debt.
  • Allowing you to sell your home means no more mortgage payments, which could mean extra money that can be used to pay off your tax debt.
  • A partial payment is better than no payment.
  • A partial payment could reduce your tax bill enough so that you could pay the remaining balance with cash at the time of closing or with another tax settlement option, such as a payment plan.

For this to happen, you must get the IRS to agree to discharge the lien. If not, you generally won’t be able to move forward with the sale.

How To Sell Your Home That Has a Tax Lien

Before you sell your home, you need to find a way to deal with the tax lien. Depending on your situation, there are several options available.

Option 1: Dispute the Tax Lien

This can work if you have reason to contest the validity of your tax debt and if the deadline for appealing has not yet passed. Potential reasons include arguing that the tax debt doesn’t belong to you or stating that you’ve already paid off your tax balance.

Option 2: Satisfy the Tax Debt

This is the most straightforward method, but often the most difficult, as it requires full payment of the tax debt. If you don’t have sufficient cash available, there could be other financing options, such as borrowing money. One possibility is to apply for a home equity line of credit and use the equity in your home to pay off the tax balance.

Option 3: Pay Off the Lien at Closing

This is where you use the proceeds from the sale to pay off your tax debt. At the closing, your attorney takes the amount you owe from any proceeds going to you and sends it to the IRS instead. After the IRS receives this payment, the IRS releases the lien. This option requires you to obtain a lien payoff letter before the closing.

Option 4: Obtain a Certificate of Discharge

A discharge removes the lien even though you acknowledge that you still owe the IRS money. According to the Internal Revenue Code, there are several provisions that provide for a lien discharge, but the three most relevant to home sales are:

  • The taxpayer has other property subject to the tax lien, and the value of this other property is equal to at least twice the amount of the tax debt.
  • The lien’s removal from the property will allow for a partial satisfaction of the tax debt.
  • The federal government’s interest in the property has no financial value.

Selling Your Home With a Tax Settlement Agreement Already in Place

Generally speaking, any current or pending arrangements with the IRS to pay your tax debt shouldn’t prevent you from selling your home. Just understand that the IRS needs to be notified about your intent to sell your home well before the closing date and that your home’s sale could affect your existing agreement.

For example, if you’re making monthly payments with an IRS simple payment plan, you might continue making payments as normal after the sale. But it’s also possible you could negotiate a different monthly payment. Generally, the IRS doesn’t file liens against taxpayers who set up these types of payment plans.

However, if you’re on a different type of payment plan and the IRS has filed a lien against you, you should expect the IRS to take all available proceeds from the sale that the IRS would be entitled to under the lien and apply it to your tax liability.

In some cases, the IRS might allow you to receive a portion of the proceeds even though there’s not enough equity in your home to fully pay your tax debt. The reason is that the IRS believes doing so will improve the chances of recovering more money to apply to your tax liability. The IRS won’t offer this arrangement voluntarily, though, and it usually requires careful negotiation with the help of a tax professional.

If you have an offer in compromise application pending, you should discuss the possibility of selling your home with your tax attorney before putting your home on the market. Selling your home may mean a significant influx of money, which could affect your offer in compromise application.

If you are considered currently not collectible, you should expect the proceeds from the home sale to go to the IRS unless otherwise negotiated.

Other Considerations

After doing your own research and/or consulting with a tax professional, you might decide that selling your home isn’t the right financial decision. In that case, you might consider other strategies.

Mortgage Refinance

Pulling out some equity in your home or lowering your monthly mortgage payment might provide the financial boost you need to get a handle on your tax situation. However, a tax lien could make refinancing an existing mortgage difficult because the IRS lien would have priority over the new mortgage. In this case, you can ask the IRS to subordinate its tax lien.

Bankruptcy

Tax debts are difficult to discharge through bankruptcy, but it’s possible if certain conditions are met. If you want to sell your home during the bankruptcy proceeding, the bankruptcy court and IRS approval may be needed before the sale can occur.

When To Use a Tax Relief Attorney To Help Sell Your Home

By now, it should be clear to you that selling a home subject to a tax lien can be daunting. Despite this, you might still be able to handle the sale yourself or with the help of your realtor. But if any of the following additional factors are present, you should strongly consider talking to a tax lawyer before beginning the house-selling process:

  • Your tax liability exceeds the equity in your home.
  • You need to sell your home as quickly as possible.
  • You are considering or have already entered into) a tax settlement arrangement with the IRS, such as a payment plan, Currently Not Collectible Status, or offer in compromise.
  • There are multiple liens on your home.
  • The IRS or state tax authorities have mentioned using additional tax collection enforcement actions, such as levies.

If any of the above situations apply, or you simply want to get a better grasp of what you’re dealing with when selling your home, get in touch with Seattle Legal Services, PLLC. You can talk to an experienced tax lawyer by calling 425-428-5262 or using our online contact form.

Selling a Home With a Tax Lien FAQs

Can the IRS stop me from selling my home?

If the IRS has a lien on your home, that won’t prohibit you from selling your home. It will, however, make the process more difficult and could affect how much you receive from the sale, as well as any other arrangements you have with the IRS concerning unpaid taxes.

How long does it take to get IRS approval for a lien discharge?

The IRS recommends submitting your lien certificate of discharge application at least 45 days before the certificate is needed. Given how the IRS is often backlogged, the sooner you apply for the discharge, the better.

What if my home is jointly owned?

If you jointly own your home with someone else, the lien only applies to the ownership interest of the owner with the tax debt. However, the joint ownership interest in the property isn’t enough to stop the IRS from forcing a sale of your home, even though only one owner owes money to the IRS.

What if I sell my house “as is” to a cash buyer?

It depends on who has the lien and the applicable state and local law. In most cases, the tax lien remains attached to your house and becomes the responsibility of the buyer after purchase. You cannot transfer a clean title when a home has a lien attached to it.

Does it make a difference if my tax lien is with the IRS or another tax authority?

For the most part, the general concepts for selling a home subject to a federal tax lien should also apply if your home is subject to a state or local tax lien. The biggest differences will likely exist in the paperwork and procedural details, which a tax resolution lawyer can assist with.

What’s the difference between a lien release and a lien discharge?

A lien release occurs after the underlying tax debt has been paid (or the statute of limitations for collecting that debt has passed). If there’s a lien discharge, the IRS or other taxing authority agrees to remove the lien from one or more assets, but the unpaid tax balance remains. It should also be noted that getting a lien released isn’t the same as a lien withdrawal, which removes the lien from the public record.

 

Sources

– https://www.irs.gov/newsroom/what-if-there-is-a-federal-tax-lien-on-my-home

– https://www.irs.gov/irm/part5/irm_05-017-002#idm140249335982880

– https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien

– https://www.law.cornell.edu/uscode/text/26/6325

– https://www.taxpayeradvocate.irs.gov/notices/lien-release/

– https://www.irs.gov/pub/irs-pdf/p594.pdf

– https://www.irs.gov/pub/irs-pdf/p783.pdf

– https://www.irs.gov/pub/irs-pdf/f656b.pdf

– https://www.irs.gov/irm/part5/irm_05-017-002

– https://www.irs.gov/irm/part5/irm_05-017-002#idm140249336188880