Can You Sell Your House With A Tax Lien?

TL;DR: Selling a house with a tax lien can be challenging but not impossible. Tax liens are claims placed on your property by a government entity due to unpaid taxes, and they can complicate the process of selling your home. This guide explains who qualifies, the rules that apply, and how to apply them to your situation.

Selling a house with a tax lien can be challenging but not impossible. Tax liens are claims placed on your property by a government entity due to unpaid taxes, and they can complicate the process of selling your home. However, with the right strategies and understanding of the process, you can sell your house even if it has a tax lien on it. This article will guide you through the necessary steps and considerations.

Understanding Tax Liens

What is a Tax Lien?

A tax lien is a legal claim against your property due to unpaid taxes. These taxes can be property taxes, state income taxes, or federal income taxes. When a government entity files a tax lien, it essentially secures their interest in your property to ensure they receive payment for the taxes owed. A tax lien doesn’t mean the government has taken over your property, but it does mean you can’t sell or refinance your property without addressing the lien.

Types of Tax Liens

1. Property Tax Lien: Filed by your local government if you fail to pay property taxes.
2. State Tax Lien: Filed by your state’s Department of Revenue if you owe state income taxes.
3. Federal Tax Lien: A tax lien Filed by the IRS if you owe federal income taxes.

How Tax Liens Affect Home Sales

Selling Your Home with a Tax Lien

Selling a home with a tax lien is possible, but it requires careful navigation. The lien must be addressed before the sale can be finalized. Here are the key points to consider:

1. Pay Off the Lien: If you have enough equity in your home, you can use the proceeds from the sale to pay off the lien. This is the most straightforward method.
2. Negotiate with the Lien Holder: You might be able to negotiate a payoff amount that is less than what you owe.
3. Discharge the Lien: In some cases, the IRS or other lien holders may discharge the lien to facilitate the sale, especially if they believe they will receive payment from the sale proceeds.

Impact on Closing: Pay off the lien with your sale proceeds

Strategies to Resolve a Tax Lien

Payment Plans and Offers in Compromise

1. Payment Plan: Arrange a payment plan with the IRS or other taxing authority to pay off the debt in installments.
2. Offer in Compromise: An Offer in Compromise allows you to settle your tax debt for less than the full amount owed. This option is based on your ability to pay, income, expenses, and asset equity. To learn more about the OIC program, read Offer in Compromise (OIC) Program: A Path to IRS Tax Relief. 

Subordination and Discharge

1. Subordination: This does not remove the lien but allows other creditors to be paid before the tax lien. This can help facilitate the sale.
2. Certificate of Discharge: This removes the lien entirely from the property, allowing the sale to proceed.

Steps to Sell Your House with a Tax Lien

Determine Your Home’s Equity

Calculate your home’s equity by subtracting your mortgage balance and any liens from the market value of your home. If your equity is sufficient to cover the tax lien, proceed with listing your home.

Contact the Lien Holder

Inform the lien holder (e.g., IRS or state government) about your intention to sell and negotiate terms for resolving the lien. This could include paying off the lien at closing from the sale proceeds.

List Your Home for Sale

Work with a real estate agent experienced in handling properties with tax liens. They can help navigate the complexities of the sale and ensure all legal requirements are met.

Closing the Sale

At closing, the lien will be paid off from the sale proceeds, ensuring a clear title for the buyer. Any remaining proceeds will go to you or towards paying off other debts.

Potential Challenges and Solutions

Insufficient Equity

If your home’s value is not enough to cover the mortgage and the tax lien, you have several options:

1. Pay Off the Lien Before Listing: Use personal savings, a personal loan, or other resources to pay off the lien before listing your home for sale.
2. Negotiate with the Lien Holder: Request a reduction in the lien amount or a payment plan that allows the sale to proceed.
3. Consult a Tax Attorney: An experienced attorney can help you explore legal options, such as disputing the lien or filing for bankruptcy if necessary.

Buyer Hesitation

Buyers may be wary of purchasing a home with a tax lien. Ensure transparency about the lien and how it will be resolved at closing. Provide documentation to reassure buyers that the lien will not impact their ownership.

Future Home Purchases

Impact on Credit

Tax liens no longer appear on your credit report, but unpaid owed back taxes can lead to financial difficulties that might affect your credit score. Despite this, you can still qualify for a mortgage if you manage your finances well.

Mortgage Options

Explore mortgage options tailored for individuals with less-than-perfect credit. FHA loans, VA loans, and other programs might be available to help you purchase a new home after resolving your tax issues.

Conclusion

Selling your house with a tax lien is complex but feasible. By understanding the nature of tax liens, resolving them through payment plans or negotiations, and working with experienced professionals, you can successfully sell your home and move forward financially. Always consider consulting a tax attorney or financial advisor to explore all available options and ensure a smooth transaction.