Selling a house is never easy, but the challenges multiply when an IRS tax lien is involved. An IRS tax lien is a legal claim the government places on your property when you owe back taxes. It’s their way of securing the debt, ensuring they get paid—even if you sell the house. This lien attaches to your home and can make potential buyers hesitate, complicating your plans to move forward with the sale.
If you’re in this situation, you’re likely wondering: “Can I even sell my house with an IRS tax lien?” The short answer is yes, but it’s not as straightforward as a typical sale. You’ll need to address the lien directly and follow a careful process to succeed. This guide will walk you through the process, step by step, so that you can control your situation. Let’s explore what you need to know to overcome this hurdle and what you can do to sell your house with an IRS tax lien.
What Is an IRS Tax Lien?
An IRS tax lien is the government’s legal claim placed on your property when you owe back taxes. This lien is the IRS’ way of securing the debt, ensuring that they get paid if you sell your home or other assets. It’s not just tied to your house—it can also affect other property you own, including vehicles and bank accounts.
The IRS files a tax lien when you fail to pay your tax debt after multiple notices. Once filed, the lien becomes public record, alerting creditors of the government’s claim on your property. The IRS places these liens to prevent you from selling or refinancing your home without addressing your unpaid taxes.
IRS tax liens work differently than other liens against your home. For example, mortgage liens are agreements you sign when borrowing money to buy a home, and although the process varies based on state law, they effectively give the lender the right to seize the property for non-payment. Judgment liens come from court rulings related to unpaid debts, such as credit cards or lawsuits. In contrast, an IRS tax lien arises when taxes go unpaid, and the IRS doesn’t need to go to court or get you to sign anything.
How an IRS Tax Lien Affects Your Property and Home Sale
An IRS tax lien clouds the title to your home, meaning it’s no longer “clear.” This complicates the sale because most buyers and their lenders require a clear title to proceed. The lien must be paid off, discharged, or subordinated to sell your home. Without addressing it, closing the sale is nearly impossible.
The amount of home equity you have determines how easily you can resolve the lien during a sale. If your home’s value exceeds the lien and other debts (like your mortgage), the lien can typically be paid off from the sale proceeds.
But what happens if you don’t have enough equity to cover the lien? In this case, the IRS may accept less than the total owed through a lien discharge or negotiation. A tax attorney can help you explore options, such as submitting an Offer in Compromise or negotiating a payment plan.
An IRS tax lien reduces your home’s appeal on the market. Buyers may hesitate to get involved with a property tied to a government claim. Even if buyers are interested, their lenders might refuse financing unless the lien is resolved before closing.
How to Sell a House with an IRS Tax Lien?
While selling a house with an IRS tax lien is challenging, it is entirely possible with proper planning. By taking the right steps, you can resolve the lien, complete the sale, and move forward. Here’s what you can do:
1. Determine the Balance Owed
The first step is to understand exactly how much you owe. Contact the IRS and request a payoff amount, which includes the original tax debt, penalties, and interest. This figure will help you plan how to address the lien.
While reviewing your debts, check for other liens on your property, such as mortgage liens or judgment liens. Multiple liens can further complicate the sale, so you need to see the full picture before proceeding.
2. Work with a Professional
Selling a house with an IRS tax lien is not a do-it-yourself task. Hiring a tax attorney, CPA, or enrolled agent ensures you have someone to guide you through the process. These professionals can negotiate with the IRS on your behalf, helping to secure lien releases or reductions.
3. Explore Lien Resolution Options Before the Sale
If you have sufficient equity in your home, the simplest option is to pay off the lien using the sale proceeds. This is often handled at closing, where the lien amount is deducted before you receive any remaining funds.
However, if your home’s value won’t fully cover the lien, you can request a lien discharge from the IRS. A discharge removes the lien from the sold property, allowing the transaction to proceed. This doesn’t eliminate your tax debt but ensures the buyer receives a clear title.
In some cases, you can establish a payment plan with the IRS and request a lien withdrawal. This shows the IRS that you’re addressing the debt, which can make them more cooperative in releasing the lien from your property.
4. Prepare Necessary Documentation
Resolving a tax lien requires careful attention to paperwork. You will generally need to gather all key documents, including but not limited to:
- IRS payoff notices or tax account transcripts
- The home’s appraisal or market valuation
- Purchase agreements with potential buyers
If you request a lien discharge, be prepared to file IRS Form 14135 (Application for Certificate of Discharge). Also, understand that the IRS may take several weeks or months to process your request, so starting early is essential.
Useful Strategies for Selling a Home with a Tax Lien
Selling a home with a tax lien requires both creativity and planning. You can overcome the challenges and find your buyer with the right strategies. Some of those strategies include:
- Targeting buyers: One effective approach is to focus on cash buyers or real estate investors familiar with lien-related sales. These buyers are often more flexible and willing to deal with the challenges of purchasing a property with a tax lien, but as a trade-off, they often offer lower prices.
- Selling with a contingency plan: A common strategy is to sell your home with the contingency that the lien will be paid off at closing. This means the IRS receives the amount owed from the sale proceeds before you collect any remaining funds. Escrow plays a vital role in managing this process. The escrow agent ensures the lien is satisfied before releasing the title to the buyer.
- Negotiating with the IRS: If the lien amount exceeds your home’s equity or you lack the funds to pay it off, you may need to negotiate with the IRS. One option is to request a Certificate of Discharge, which removes the lien from the property being sold while the debt remains attached to other assets.
- Exploring short sales: A short sale may be an option if your home’s value is less than the lien and mortgage balance combined. In this scenario, the mortgage lender and the IRS agree to accept less than the full amount owed. A short sale requires thorough documentation and cooperation between you, the IRS, and your lender.
- Creating a lease-to-own agreement: If selling outright is proving difficult, a lease-to-own agreement could provide an alternative. This option allows a potential buyer to lease the home with the intent to purchase once the lien is resolved. During this arrangement, you retain ownership and can use lease payments to address the lien or other financial obligations. This strategy buys time while still moving toward a resolution.
By using one of these strategies or combining them, you can find a workable path forward, even with the challenges of a tax lien. Everyone’s situation is unique, so you might want to consult with a tax attorney to understand which strategy would work best.
Closing Considerations
At closing, the IRS tax lien must be satisfied before the title can transfer to the buyer. The lien amount is typically deducted from the sale proceeds, ensuring the debt is paid off before receiving any remaining funds.
If the lien amount exceeds the sale proceeds, you may need to negotiate with the IRS for a reduced payoff or use personal funds to cover the shortfall. Otherwise, you will need to get the IRS to agree to discharge the lien from your home so that you can move forward with the sale. Without satisfying the lien, the sale cannot proceed.
Escrow plays a crucial role in managing the funds and ensuring all debts, including the IRS tax lien, are paid. The escrow officer works as a neutral third party to appropriately hold and distribute the buyer’s funds.
Before closing, the escrow officer ensures that the lien payoff amount is accurate and coordinates the payment to the IRS. This step protects both you and the buyer, ensuring the title is clear and free of claims.
Once the IRS receives payment, they should issue a lien release. However, this process isn’t automatic, and you will need to confirm that the release is completed. According to the IRS’ website, the IRS typically provides a Certificate of Release of Federal Tax Lien, which proves the lien is no longer valid. You might want to follow up with the IRS to ensure the release is processed. This step can take up to 30 days, so don’t assume the lien is resolved until you have official confirmation.
Alternatives to Selling with an IRS Tax Lien
If selling your home isn’t feasible or desirable, there are other ways to address an IRS tax lien. These alternatives can help you resolve your tax debt while keeping your property or finding a more manageable solution. Here are some options to consider:
- Paying the tax debt through an installment agreement. One of the most direct ways to resolve a tax lien is to set up an installment agreement with the IRS. This allows you to pay the debt off in monthly payments over time, making it easier to manage without selling your home. If you owe less than $25,000, you can request a lien withdrawal after three monthly payments, which clears the property title.
- Settling the taxes with an Offer in Compromise. Another option is an Offer in Compromise, where the IRS agrees to settle your tax debt for less than the full amount owed. This option is only available if you can prove you cannot pay the full debt or are in financial hardship. A tax attorney can help you determine your qualifications and guide you through the application process.
- Refinancing to consolidate the lien amount. If you have enough equity in your home, refinancing your mortgage might be a viable solution. By refinancing, you can consolidate your existing mortgage and the IRS lien into one loan. This allows you to pay off the lien in full while potentially securing a lower interest rate. However, keep in mind that refinancing requires lender approval, and the IRS must agree to subordinate its lien to the new loan.
- Filing for bankruptcy. Bankruptcy may be an option for resolving overwhelming tax debt, but it’s a complex decision that requires careful consideration. Depending on the type of bankruptcy you file (Chapter 7 or Chapter 13), the lien may be partially or fully discharged, or you may enter into a repayment plan. Not all tax debts are dischargeable in bankruptcy, and specific conditions must be met. A bankruptcy attorney can evaluate your case and explain how filing might impact your IRS tax lien.
- Renting the property while resolving the lien. If selling isn’t an immediate option, renting out the property can provide a temporary solution. Rental income can help you make payments toward the lien through an installment agreement or save for a lump-sum payoff. While this approach doesn’t resolve the lien immediately, it allows you to retain ownership of the property and generate income while working on a long-term solution.
Every situation is unique, and the best alternative depends on your financial circumstances, property value, and long-term goals. With the right plan and professional guidance, you can find a solution that fits your needs and paves the way for a stronger financial future.
Is There an IRS Tax Lien on Your House? Contact Wiggam Law
An IRS tax lien doesn’t have to define your future or keep you stuck in a frustrating situation. At Wiggam Law, help our clients turn their overwhelming tax problems into manageable solutions. Whether you’re ready to sell your home, explore refinancing, or fight for a lien reduction, we’re here to create a strategy that fits your life—not just the IRS’s demands. Call our office at (404) 233-9800 or use our contact form to request a consultation.