Selling a house is never easy. From inspections to viewings to the closing, the entire process is grueling. But if you have a tax lien, selling your property becomes even more complicated. If there is a federal tax lien on your home, you must deal with the lien before selling your home. Here’s what you need to do.
Disclaimer: This guide is intended for educational purposes only. We recommend contacting your local tax relief professionals who have tax attorneys on staff to assist with removing your lien. You can find out here if you qualify for IRS hardship programs.
The whole thing may be overwhelming. When a government body like the IRS files a tax lien against you, it might seem like your options are limited. The good news is there is still hope.
Below, we’ll walk through what you need to know about a tax lien and how you can sell even with a tax lien on your house.
What is a tax lien on your home?
By definition, a lien is “a right to keep possession of property belonging to another person until a debt owed by that person is discharged.” This is exactly what happens when a government body files a tax lien against your home. In other words, the agency can lay claim to your home unless and until the property tax you owe is paid in full.
There are multiple reasons the IRS or other agency may file a lien against your home; failure to pay property taxes isn’t the only one. For instance, if you are behind on your income taxes, your state or local governments can file a lien on your home.
A lien is not necessarily a problem if you pay your taxes in a timely fashion. Wait too long, though, and the government could be forced to take action, such as sending the debt to collections. If you are overwhelmed by tax debt, find out if you qualify for IRS hardship programs.
Types of tax liens
Failure to pay any of the following types of taxes could result in a lien. All of these liens can be placed on your home, so it’s important to keep up with the taxes you owe.
Property tax liens
A property tax lien is issued for failure to pay property taxes to a city or county government. If you have property taxes owed, a lien could be issued depending on the circumstances.
State tax liens
A state tax lien is filed if you haven’t paid your state income taxes. If you have unpaid income taxes owed, you can expect to receive communication from the state Department of Revenue.
Federal tax liens
You may have back taxes you still haven’t paid to the federal government. In that case, a federal tax lien is filed by the Internal Revenue Service (IRS) if you have failed to pay your federal income taxes.
How tax liens affect the sale of your home
The first thing to know is that it’s still possible to sell your house if you have a tax lien. However, you won’t be able to do without first resolving the lien.
It’s possible to sell a house even if it has a lien on it. But selling your home won’t remove the lien on it unless your taxes are repaid. Thus, listing a home with a lien may be risky unless you know the sale price will allow you to repay your tax debt. This can also discourage potential buyers from making an offer.
Indeed, if you list your home with a lien on it, you must be able to pay off the unpaid taxes before closing. When closing on the sale, if the sale price exceeds what you owe (less your equity in the home), you may be able to pay off the lien using the proceeds from the sale.
If the real estate market is a seller’s market, as was the case during the COVID-19 pandemic, that may also help increase your home’s market value. But selling your home is just one way a property owner can resolve their tax lien.
Another way to absolve yourself of a tax lien is by having the government discharge the tax debt, but those requests are not guaranteed. So whether you do that using the home sale proceeds or by some other means, the best thing to do is have your debt repaid before you close on the sale.
Tax lien discoverability
If you are hoping to keep the tax lien quiet until after you transfer ownership, you may want to reconsider. It’s important to disclose this when meeting with potential buyers and real estate agents.
You may think that a lien would make your home more difficult to sell—and perhaps it will. But even if you try to keep it a secret, a simple title search would reveal there is a lien on the home.
Needless to say, this is a situation you want to avoid. If a buyer finds out there is a lien on your home; they will probably wonder what else you are hiding from them. That’s why it is better to be upfront and transparent with those viewing the home.
How to sell your home with a tax lien
Do you have a lien but would still like to sell your house? You have several options for selling your home, even if you have an outstanding tax lien.
Pay the delinquent tax
The most straightforward solution to selling a home with a lien attached is first to pay the tax owed.
For example, a payment plan may be an option. The IRS is quite flexible in setting up payment plans for outstanding income taxes. They will work with you to set up a payment plan that works for your income. Alternatively, an offer in compromise could allow you to settle your delinquent taxes for less than you currently owe.
There are other options, too, such as using a personal loan. This option is less favorable but is still better than repossession.
Dispute the tax lien
Another option to reduce or eliminate your taxes owed is to dispute the tax lien. Of course, you should only go this route if you have reason to believe you don’t owe what the lien holder says you owe. For example, if the lien should have been sent to someone else, you can dispute it. But keep in mind that this process, too, is not an easy one.
You may need to request a hearing complete with a tax attorney if you’d like to dispute your tax lien. In addition, you should be armed with proof that you don’t owe what the IRS or other government agency says you owe.
Request certificate of discharge
Requesting a certificate of discharge will remove the lien from your home, allowing you to sell your home without a lien. This does not eliminate the financial burden of the taxes owed, but it may make the process easier.
Plus, imagine your outstanding tax debts are less than the difference between the sale price and your home equity. In that case, a certificate of discharge will grant you a lien release and may help you cut back on some of the headaches of trying to sell your house with a lien.
Pay the lien off at closing
Another option is to pay off the lien amount on your own at closing. But if you pursue this option, you will need to request a lien release from the IRS before the sale is finalized. That means extra paperwork, which could delay the closing process.
If you choose this option, a better way is to work with a closing attorney who will help you ensure the funds are successfully transferred.
Sell your house as-is
You might be tempted to make renovations or other improvements to your property before selling it. And yet, it’s likely better to sell your house as-is.
After all, repairs and renovations take time. And if you have delinquent property taxes or other liens on your home, you could continue to accrue interest on the debt. Even if those improvements increase the value of your home, they may not be enough to offset the additional fees you may incur.
Plus, when you sell your home, there are additional fees, such as closing costs and fees paid to a real estate agent. All of that adds up, so it may be better to save yourself the headache and simply sell your home as-is.
Wait for the lien to expire
If you owe taxes you don’t think you will be able to pay; you could wait for the lien to expire. However, we mention this last because it’s far from the best way to resolve your tax lien.
If you have a lien, it means you have some kind of tax liability you still haven’t met. Hence, you owe someone money, and they will want that money sooner or later. That means there’s a good chance you will have collections going after you unless the unpaid taxes are only a small amount.
Plus, IRS tax liens don’t expire for ten years. Other creditors could renew the lien in an attempt to collect the money they are owed. Thus, waiting for the lien’s expiration date is far from the best strategy and is best to avoid if possible.
Resolve your lien sooner than later
If you have a lien on your home, it can be overwhelming, and you may not be sure what your next steps are. However, you still have several options, including selling your home to cover the cost and requesting a certificate of discharge.
Whatever option you decide to pursue, it’s best to take care of your tax lien sooner rather than later. Work with a tax advisor to help you sort through the debt, but don’t wait to pay it off. Because of fees and the prospect of collections, the sooner you resolve your lien, the better. Delaying the process can only make things worse, and once you pay off your tax lien, you will be nothing but glad you did.
- If there is a federal tax lien on your home, you must deal with the lien before selling your home.
- A lien is “a right to keep possession of property belonging to another person until a debt owed by that person is discharged.”
- If you are behind on your income taxes, your state or local governments can file a lien on your home.
- There are three main types of tax liens that can be placed on your property: property tax liens, state tax liens, and federal tax liens.
- Tax liens will come up during a sale, so it’s important to disclose this when meeting with potential buyers and real estate agents.
- If you are trying to sell a home with a tax lien, you have several options:
- Pay the delinquent tax.
- Dispute the tax lien.
- Request a certificate of discharge.
- Pay the lien at closing.
- Sell your house as-is.
- Wait for the lien to expire.
- Resolve your lien sooner rather than later
- What if there is a federal tax lien on my home? – IRS
- Understanding a federal tax lien – IRS
- Buying a House with a Tax Lien? Here’s What You Need to Know0 – SuperMoney
- How to remove an IRS tax lien? – SuperMoney
- How to remove an IRS levy – SuperMoney