The IRS says if there is a federal tax lien on your home, you are required to satisfy it before you can sell or refinance. The presence of other types of liens can make a home sale challenging, too. While it is possible to sell your home when you have a lien against the property, you are much better off paying your tax debt or other lien debt.
The IRS is increasing the threshold amount for filing a lien, updating it to inflationary changes since the number was last revised. In the meantime, you either want to sell your home to satisfy tax or other debts, or you just want to move.
How does all this work?
What Is a Lien Against Property?
A lien is a legal claim against a property because the property owner owes a creditor money.
One type of lien common to almost all homeowners is a voluntary one — that's your mortgage lien. It is not imposed as a punishment. Instead, it represents the debt owed to the lender. There are consequences if the debt goes unpaid, but the lien doesn't start out as a tool to enforce payment of past debt.
Most liens are involuntary. They are placed because the property owner owes someone money, often taxes to a government entity. However, mechanic's and material man's liens can be set if a property owner does not pay a contractor, subcontractor, or construction worker for work performed on the property.
A lien gives the lien holder the right to seize the property for sale to satisfy the debt if the owner does not pay up. If the owner does pay off the debt, the lien is satisfied. After a few more steps, the lien is released, and the property can be sold.
Types of Tax Liens
Think of all the different types of taxes you pay throughout the year. For each type, a lien can be used for non-payment.
Tax liens can keep you from selling a house or prevent you from receiving equity from the sale until the tax debt is satisfied. If you received at least two notices from taxing authorities, you are subject to collection actions, including the seizure of property and assets. You may even get a visit from a Revenue Officer.
- Property tax liens are placed on a home for unpaid property taxes due to the county or city.
- State tax liens are placed on a property for back taxes due to the state’s Department of Revenue.
- Federal tax liens are placed on the property by the IRS for unpaid federal income taxes.
- HOA liens are placed for non-payment of HOA dues. In states like Texas, the HOA has the power to take your home for non-payment.
- Judgment liens are ruled by the court for unfulfilled contractual obligations.
You need to remember that unpaid taxes continue to accrue interest and penalties. The sooner you pay off the debt, the better.
Discovering the Tax Lien
You might want to sweep the lien under the rug and hope nobody notices before the sale closes, but that’s unlikely to work. Liens are discoverable during a title search or investigation, which is always performed as part of the home sale process.
Always tell your real estate agent about any liens against your property. They can help you through the process of getting it lifted, provided it is simple. A complex lien may require the services of a qualified tax attorney or a tax advisor. Engage someone to help as soon as possible.
Selling a House with a Lien
The best thing to do is to pay off the debt before listing the house for sale. If you can’t afford to do so, you have a couple of options.
- Negotiate with the lien holder for a solution, like paying a percentage owed or entering into a payment agreement.
- Negotiating with the buyer to take over the lien.
Suppose you determine to sell the house to pay the debt. In that case, you assume you have enough equity after commissions and other sale fees to pay the debt altogether. A closing attorney takes care of submitting the funds to satisfy the lien.
However, if the tax lien exceeds the earnings from the sale, you must bring the rest of the cash to closing to pay off the debt. You can try removing the lien, but most taxing authorities won't do it without a total payoff.
If you sell your house and still have tax debt and can't make up the difference, your last option is bankruptcy. Bankruptcy does not clear tax debt. You still can't sell your house because of the lien. But bankruptcy does ensure the IRS gets paid by the bankruptcy trustee.
Your best option is to pay as much toward the tax debt as possible before the sale.
Removing a Lien
Paying off the debt to the satisfaction of the claimant is the only way to remove a lien. You have options to move things along.
You can pay off the tax debt directly through a payment plan. The IRS is making fundamental changes to liens when a taxpayer enters into a Direct Debit Installment Agreement (DDIA).
Another option is to get an Offer in Compromise accepted, so you can pay off a fraction of the amount and call it good.
An alternative to dealing with the government is to obtain a personal loan, like a home equity line of credit. If you go this route, do it early. You need to pay off the tax debt and get the lien lifted before you can close the home sale.
The IRS is in the process of modifying the procedure for lien withdrawal. If the taxpayer requests it, the lien is withdrawn as soon as the taxes are paid off, including interest and penalties.
Other ways to ease a lien are available.
- Apply for subordination - ask the IRS to subordinate their claim behind other creditors on a mortgage loan. It means the feds don’t get first preference for payment.
- Present a Certificate of Discharge - you might convince the IRS to grant a partial release for a specific property. You still have a lien, but that property can now be sold to pay it off.
- Dispute the lien - Maybe you already paid the tax debt, or the debt was assigned to you because you have a similar name to a tax deadbeat.
You can sell a property with a tax lien, but technically the lien should be satisfied before the sale closes. You can negotiate with the buyer to take over the lien, but most don't want to do that.
Instead, take steps to relieve your tax burden through a payment plan, Offer in Compromise, or personal loan. Otherwise, dispute the lien if you believe it was placed in error. Bankruptcy is an option, but it doesn’t get rid of the lien. And waiting for the 10-year statute of limitations probably won’t work.
Contact Top Tax Defenders to learn how we can help you discharge tax liens and sell your house.