Can I Sell My Home If I Owe the IRS? What If I Have a Tax Lien?

Key Takeaways

• Selling a home with a lien: You can sell your house with a lien. The process is more complicated than a normal sale and will require satisfying the tax lien first.
• IRS Discharge Required: When your home has little or no equity, you will need to get the lien discharged by the IRS prior to selling.
• Verification of Fair Market Value: Often, an appraisal is required on the home. The IRS requires a sale at market value.
• Plan: It is essential to start the lien discharge process early to avoid delays in the closing process.

You can sell your home if there is an IRS tax lien against it, but the tax lien will complicate and slow down the process. If you don't pay your taxes, the IRS may issue a tax lien against you. The lien will attach to your home and other assets, and that can make it difficult to sell or refinance your home.

This post explains how to sell your home if you have a federal tax lien, what to expect during the process, tips for getting through closing when there is a lien against your home and a look at alternatives. To get guidance right now, use TaxCure to find a tax pro to help you decide the best way forward. 

What Happens If You Sell a Home With an IRS Tax Lien

If you sell a home with an IRS tax lien against it, the proceeds of the sale must be used to satisfy the tax lien. If you own the home outright, the proceeds of the sale will go to the IRS to cover your tax debt, and you will get any remaining amount. 

For example, say you sell a home for $200,000 and the tax lien is for $50,000. The closing company pays the IRS $50,000, and you get to keep the remaining $150,000. While the lien is in place, there is no way to get around this requirement. Title companies handle the transfer of property titles, and they must make sure all liens are clear before transferring the property to the new owner. 

The process is similar if you have a mortgage, but in this case, some of the sale proceeds will go to the mortgage lender. Now, let's say you sell your home for $200,000. You owe $100,000 to the mortgage lender and $50,000 to the IRS. The closing company sends out those payments, and you get the remaining $50,000. 

If you have little or no equity in your home, the process plays out a bit differently. Imagine your home is worth $500,000, you owe $500,000 on your mortgage, and the IRS has a tax lien against you for $50,000. If you sell your home, you will be able to pay off the mortgage in full, but there will be nothing left to pay the IRS. 

Before you can sell your home, you must get the IRS to discharge the tax lien. Otherwise, the lien will stay attached to the home's title, and you will not be able to sell. A discharge removes the lien from this specific price of property but not from anything else you own.

Potential Complications With Lien Discharges

Generally, the IRS will not agree to discharge the lien if you are selling the home for less than its fair market value (FMV). In particular, the IRS looks out for situations where someone tries to get away from their tax debt by selling the home for less than its FMV to a friend, family member, or other close associate. 

To convince the IRS that the sale price is legitimate, you will need to get a qualified appraisal that backs up your sale price. If you're selling the property in a non-arms length transaction (ie to a close relative or associate), the IRS may require you to get two appraisals or an appraisal with a letter from a disinterested real estate agent. 

However, in some cases, the IRS may accept an equalization value as the FMV of the property. You determine equalization value by multiplying the property's assessed value for property tax purposes by a certain multiplier. Because property tax-assessed values are often one-third of the FMV, three is often used as the multiplier. 

Potential Problems With Closing the Property

As explained above, it is possible to sell your home when there is a tax lien against it, but closing the property can take extra time and more paperwork than usual. If you have enough equity in your home to satisfy the tax lien and any loans against the property, the process should be fairly straightforward. 

During the closing, the title company will accept the funds from the buyer and put them in escrow. Then, they will dispatch the funds to the parties that have liens against the property (the IRS and the mortgage lender), and they will give you a check or a bank transfer for the remaining amount. 

If the projected sale proceeds aren't enough to cover all of the liens against the property, the process will be slower and more complicated. Mortgage lenders will generally not be willing to approve a loan for a property that has a tax lien against it. Thus, you will need to get the lien discharged before the buyer can get financing to buy the property, and the discharge process usually takes at least 30 days. 

Many buyers do not have time for these types of delays, especially if the market is hot. To avoid problems, you should start working on the discharge process as soon as possible.

Remember, if you're selling your home without taking care of the tax lien, the IRS may require additional proof that you're selling the home for its full value before they agree to the discharge. When you file Form 14135 to request the discharge, note the equalization value on the form and also explain that you are getting an appraisal. Then, notify the IRS as soon as you have the appraised value.

Transferring Property Without Removing the Lien

You can transfer property without removing the lien, but this, too, can be complicated. Say you own your home outright and give it to a relative. You can transfer the title into their name, with the lien on the title. This is called a clouded title. 

The lien will remain attached to the property, and if the new owner decides to sell the property, they will need to clear the lien first. They will generally also need to clear the lien if they want to take out a loan against the house. 

Tips for Selling a Home With an IRS Tax Lien

If you want to sell your home while there is a tax lien against it, keep the following tips in mind:

• Get an estimate of the home's value to determine if you will be able to pay off your tax bill with the proceeds of the sale. 
• File the request for lien subordination or discharge forms as soon as possible. 
• Request a 60-day closing so that there is ample time to process the paperwork.
• Obtain a payoff letter from the mortgage company so that the IRS can determine how much they are likely to get from the sale.
• Consider targeting investors or other buyers who are comfortable with tax lien sales.
• Talk with a tax pro experienced with real estate sales involving tax liens. They will be able to help with the paperwork and ensure the process goes smoothly.

Situations Where You Should Wait to Sell Your Home

You don't have to sell your home if there is a tax lien against it, and in some cases, it may be better to wait. In particular, look at the collection statute expiration date (CSED) related to the tax debt. Once the CSED passes, the IRS can no longer collect the debt, and the lien will be removed. If the debt is close to expiring, you may want to let that happen before you sell your home. 

The CSED is 10 years from the date the tax was assessed, but it can get tolled for a variety of reasons so the actual date may be slightly different. For example, if you apply for an offer in compromise, the IRS pauses the clock on the statute of limitations while it reviews your application, and then, they extend the expiration date by the amount of time that the clock was paused. 

Thus, your CSED may be slightly longer than the expected 10 years. However, it's important to note that the IRS frequently makes mistakes when dealing with the CSED. A tax pro can review your account and ensure that the date has been set correctly. 

If you're dealing with a tax lien against your home, bankruptcy can be another option. Keep in mind that if you sell your home for less than you owe on the home loan, the mortgage company will issue a 1099-C (Cancellation of Debt), and generally, you must report that amount as income on your tax return and pay taxes accordingly. Thus, this situation can lead to even more unwanted tax debt. Bankruptcy may be able to help you get around this problem.

Depending on the type of bankruptcy you file, you may be able to keep your home (especially if it doesn't have a lot of equity), and as long as your tax debt is income tax that is at least three years old, you may be able to discharge it by filing bankruptcy. 

Neither of the above options is intended to be legal advice. Instead, this highlights the complexity of the options available and the need to consult a tax professional. 

How to Remove a Tax Lien Against Your Home

Want to remove the tax lien before you sell the home? Here are the options:

• Pay the tax debt in full - the IRS will withdraw the lien 30 days after you have paid.
• Prove that the lien was filed incorrectly or prematurely - the IRS must follow a specific protocol and timeline when filing a notice of federal tax lien. 
• Request a discharge of the tax lien - As explained above, a discharge is when the IRS removes the lien from a specific piece of property. Generally, the IRS will only agree to a discharge if they believe that doing so will help you pay the tax debt.
• Ask for a lien subordination - A subordination is when the IRS agrees to let another lien holder take precedence over the IRS lien. For example, if you want to take out a home equity loan to pay off the tax debt, the IRS will need to agree to subordinate its lien before the lender will grant you the home equity loan.

You may also be able to set up a payment plan that requires the lien to be withdrawn. To qualify, you must owe $25,000 or less. If possible, make a payment to bring your tax debt under this threshold. You must be able to pay off the debt in monthly payments within the next 60 months or by the CSED if sooner. 

Additionally, you must be in full compliance with your filing and payment obligations. You must agree to direct debits from your bank account, and you must not have defaulted on a previous payment agreement. If you meet those conditions, the IRS will typically withdraw the lien after you've made three monthly payments. 

Keeping a Home With an IRS Tax Lien

If you decide to ignore the tax lien, the IRS may move forward with seizing your home. However, this only happens in rare situations. The IRS will exhaust nearly every other collection option before it resorts to taking a taxpayer's home. The agency will garnish your wages and seize your bank accounts or investment accounts long before it will move forward with seizing your home. 

With the other options, the IRS is taking cash, which is relatively easy to do, but if the agency decides to seize your home, it will need to sell the property to get the proceeds, which is time-consuming and costly. The additional costs will be added to your tax bill so that's not ideal either.

However, if there is a lien against your home, it's important to be aware that this is a possibility. Although the IRS seizes primary residences very rarely, it has the right to do so, but first, the agency must get written permission from the district court in your area or go through the foreclosure process based on your state laws.

Other Types of Tax Liens That Can Affect Selling Your Home

In addition to the IRS, other tax authorities may issue tax liens against your home. In particular, if you don't pay property tax, the county will issue a tax lien against your home. Similarly, if you have unpaid state taxes, the state revenue agency can issue tax liens against your home. 

Note that states have their own tax collection laws. Although IRS tax debt expires in 10 years, state tax debt can last longer - some states have a 20-year statute of limitations on collecting tax debt. If you live in one of those states, you have to be aware that the state's lien on your home may last much longer than the IRS lien on your home. 

What to Expect After the Sale

If the proceeds from selling your home take care of the tax debt, the IRS will release the tax lien. Typically, the agency releases the tax lien 30 days after you pay off the tax debt. You may want to follow up with the agency to ensure that the tax lien has been correctly released. 

In cases where the IRS discharges the lien so that you can sell the home, the lien will continue to exist, and it will attach to all of your other current and future property. Say you inherit a house after selling your current residence—the lien will attach to that home. However, the IRS generally won't discharge the tax lien from the home unless you make other arrangements to pay your taxes. 

Alternatives to Selling Your Home

Don't feel like you need to sell your home if there is a tax lien attached to it. The IRS will only take your home in very extreme situations, and in most cases, you should be able to find a way to address the tax debt and keep your home. Here are the main options:

• Installment agreement - Pay monthly payments on the tax debt until it's paid off. If you owe less than $25,000 and have a history of compliance, the IRS may be willing to remove the tax lien as you make payments. 
• Offer in compromise - Pay a portion of the tax debt in a lump sum, and the IRS will waive the remaining amount. You must prove that you are paying the most you can afford to pay based on your income and the equity in your assets. The IRS wants you to include your home's equity in your offer, but the agency only makes you consider 80% of the home's value when determining this number. For example, if your home's FMV is $500,000, the IRS will let you calculate the equity based on $400,000 in value. 
• Effective tax administration - This is a type of offer in compromise where extenuating circumstances convince the IRS to accept a slightly lower settlement. For example, if moving would create financial hardship, you may be able to convince the IRS not to include all of your home's equity in the offer.
• Partial payment installment agreement - This option includes elements of both a payment plan and an offer in compromise. You make monthly payments until the CSED, and then the remaining debt expires. The IRS will also take your home's equity into account when reviewing your application. 

To get help choosing the right option for your situation, contact a tax professional today. Using TaxCure, you can search for local pros in your area, and you can narrow down your search to find someone experienced with tax liens and lien withdrawals.

FAQs About Selling Your Home With a Tax Lien

Can you sell a house if you owe taxes?

Yes, you can sell your home if you owe back taxes. However, if the IRS has already issued a tax lien, the process will take longer and require more paperwork. 

Can you buy a house if you have a tax lien?

Tax liens attach to property you own now and that you acquire in the future. If you buy a home while there is a tax lien against you, the lien will automatically attach to the new property. Most lenders will not give you a loan if you have an outstanding tax lien, but it may be possible to buy a home if you have cash or work with an alternative lender who charges high interest rates.

Can I buy a house if I owe taxes?

Lenders will generally not give you a loan if there is a notice of federal tax lien against you. However, if you are on a payment plan, lenders may give you a home loan, but they will take your tax debt payments into account when considering your debt-to-income ratio.

How do tax liens affect your home's equity?

Tax liens reduce your equity in your home. Your equity is the difference between your home's value and the amount you owe. Tax liens increase the amount you owe and reduce the equity accordingly. 

How do tax liens affect your home's value?

Tax liens do not have a direct impact on your home's value. However, because of the way that tax liens complicate a sale, they can make it harder to find a buyer. Some buyers may not be willing to wait while you deal with the tax paperwork, and that can indirectly lead to a lower sale value for your home.

Do tax liens affect your credit score?

In 2018, IRS tax liens stopped showing up on credit reports, and by extension, they don't affect your credit score. However, tax liens are public records, and lenders can easily find out about them, making it harder for you to get credit cards or loans when you have a tax lien. 

Do you need to disclose tax liens to prospective buyers?

No, you do not need to tell buyers about the tax lien. If you can take care of your tax lien as explained above, you won't necessarily have to mention it to the buyer. However, that doesn't mean that you can just ignore the tax lien during the sale. Before buying a property, the buyer will do a title search which will show all liens against the property, and the sale will not go through if there are unresolved liens against the property.

Can an IRS tax lien be transferred to a new property owner?

Yes, you can transfer property with a lien attached, but usually, this only happens if you give away the property or if you have a buyer who is willing to take the property with a lien on it. Most lenders will not give loans to buyers if the property already has a lien against it, but there are exceptions.

What if there is a tax lien against jointly owned property?

The way a tax lien affects jointly owned property depends on the way that the property is owned, the relationship of the people who own the property, and the laws in your state. Depending on the specifics, the lien may attach to all of the property, and you may have to satisfy the entire lien if you sell the property. 

Alternatively, the lien may only attach to the taxpayer's interest in the property. For example, if the taxpayer owns half of the property, the IRS will only be entitled to up to half of the proceeds of the sale. Laws vary with married couples and community property states.

Get Help Dealing With Tax Liens Against Your Home

Owing taxes is stressful, but it's even worse when there is a tax lien against your home. To get help and guidance through this situation, use TaxCure to find a tax professional today. They will walk you through different scenarios and help you decide on the best resolution option based on your budget and preferences.