Can You Sell a House with a Tax Lien?

Financial hardship and unexpected expenses can lead to falling behind on taxes and even a tax lien on your property. Sometimes, selling your property with a tax lien can be the best solution.

A tax lien is a legal claim on the property due to unpaid taxes. If you’re trying to sell a home with a lien, you need to know what a tax lien is, why it might be higher than the original taxes owed, and the steps you can take to resolve it.

Can you sell a house with a tax lien on it? What steps do you need to take to ensure a successful sale Whether you’re a homeowner needing to clear a tax lien or a real estate professional guiding clients through this process, this guide will provide the clarity and actionable advice you need.

What Is a Tax Lien?

When you owe taxes for an extended period, the government wants to make sure they are repaid and to do so, they will file a tax lien on real estate that you own. A tax lien is a legal claim on a property due to the owner’s unpaid taxes and signals that the title is not clear.

While tax liens can be put in place due to unpaid property taxes, they can also be imposed if an owner has unpaid income taxes owed or other local or federal taxes.

There are three different types of tax liens:

• Property Tax Lien
  A property tax lien is the most common type of tax lien and occurs when a homeowner fails to pay their property taxes. The local government places a lien on the property, which must be satisfied before the property can be sold or transferred.
• IRS Tax Lien
  When a property owner fails to pay federal taxes, the Internal Revenue Service (IRS) can place a lien on all the individual’s assets, including real estate owned. This type of lien indicates that the government has a legal right to the property until the debt is paid.
• State Tax Lien
  A state tax lien can be placed on a property for unpaid state taxes, including income and other state-imposed taxes.

How to Figure Out if Your House Has a Tax Lien

You might not know if you have a tax lien on your property, especially if you find yourself in a situation where you have inherited a home.

The easiest way to uncover a tax lien is by having a title search done. A title search is a thorough examination of public records to confirm the property’s legal ownership and to identify any liens or claims against it. A local title company can help you run a title search and identify any potential liens.

Implications of a Tax Lien

If you uncover a tax lien, it’s important to know that it can significantly impact your ability to sell. A tax lien must be resolved before the property can be sold and ownership transferred to another party.

Potential buyers may be deterred by the additional complications and costs associated with clearing the lien. If the sale proceeds are enough to pay off the lien, it makes the process easier, but if you are left owing money, then it considerably complicates the process. Unpaid taxes accrue interest and penalties over time, so an unpaid lien can quickly add up and eat into a property sale’s proceeds.

Furthermore, owners should know that a tax lien can negatively affect their credit score, making it more challenging to obtain loans or other forms of credit in the future.

Why Is My Tax Lien Higher than the Taxes Owed?

If you discovered a tax lien on your property, you might already know the tax bill that is owed that caused the tax lien and are wondering why the amount owed on the tax lien is so much more than your original tax bill.

There are several reasons why this can happen, but it is usually due to a compounding factor of fees and interest. The following changes increase a tax liens amount, causing it to grow over time:

• Accrued Interest
  When taxes remain unpaid, interest is typically charged on the outstanding balance. Over time, this interest can accumulate significantly. The taxing authority sets the interest rate and can compound, meaning you pay interest on both the principal and the accrued interest.
• Penalties and Fees
  When you pay your taxes late, you are not only responsible for interest but there are usually additional penalties and fees. These can include late payment penalties, filing fees, and administrative costs associated with managing the delinquent account.
• Legal and Administrative Costs
  Additional costs can be incurred if the taxing authority takes legal action to enforce the lien. This can include court costs, legal fees, and expenses related to the enforcement process. These costs are typically added to the total amount of the lien.
• Errors and Miscalculations
  Occasionally, errors or miscalculations by the taxing authority can result in an inflated lien amount. This could be due to incorrect application of interest rates, penalties, or fees. It’s important to review your tax lien statement carefully and verify the accuracy of the amounts listed.

If you are concerned that the amount owed on your tax lien is incorrect, contact the taxing authority to request a detailed breakdown of the lien.

If you identify any errors or discrepancies in the lien amount, you can dispute these with the taxing authority. Provide documentation to support your claim and request a corrected lien amount.

Options for Selling a House with a Tax Lien

Selling a house with a tax lien can be complicated, but you have options. Sellers might need to go through some extra steps or sell their property for a little less.

Dispute the Tax Lien with the IRS or Other Government Entity

If you believe the tax lien is incorrect or unfair, you have the option to dispute it. To start the process, you need to get in touch with the government body that placed the lien on the property. For example, if it is a federal tax lien, you will need to contact the IRS, but if it’s a property tax lien, you’ll need to contact your local county.

Request a detailed statement from the taxing authority to understand the basis of the lien. Your statement should show the original tax amount due plus any accrued interest, penalties, and fees. Once you have this information, you can review it and determine if there are any errors.

To dispute a tax lien, you’ll need to provide supporting documentation and then submit a formal dispute with the IRS or the relevant government entity. This process may involve filling out specific forms and providing supporting documentation.

Throughout the process, stay in contact with the taxing authority to monitor the status of your dispute and provide additional information if needed. Do not expect a resolution overnight, as a tax lien dispute can take several months.

Request a Certificate of Discharge

A Certificate of Discharge indicates that the lien no longer applies to the property in question, even if the lien may still be in place on other taxpayer-owned assets. You can get one of these certificates either if you pay your tax debt or if you own more than one property, you can sometimes negotiate the lien to be removed from the property you want to sell. Alternatively, you may have to get one of these certificates if you plan to pay the debt at closing.

Obtaining a Certificate of Discharge can facilitate the sale of a property by clearing the title of any encumbrances related to the tax lien. Here’s the process:

• Apply for the Certificate: Submit a request for a Certificate of Discharge to the IRS or the relevant taxing authority. If you are requesting the certificate without paying the tax lien so that you can sell the property, you will need to provide details about the sale and the lien.
• Provide Sale Information: Include information about the pending sale, such as the sale price, contract, appraisal or valuation, proof of outstanding mortgage and other liens on the property, a title report, and the buyer’s details.
• Explain the Payment Plan: Detail how the sale proceeds will be used to satisfy the tax lien. This often involves paying the lien amount directly from the sale proceeds at closing.
• Wait for Approval: The relevant taxing authority will review the application and supporting documents. If they approve the application, they will issue the Certificate of Discharge.
• Pay the Lien: The taxing authority will require payment of the lien amount from the sale proceeds, usually done through escrow. This can be done at closing, so make sure you communicate accordingly with your real estate agent and escrow company.

After receiving the Certificate of Discharge, the lien is removed from the specific property. However, it’s important to note that the lien may still exist on other assets or properties owned by the taxpayer.

Satisfy the Delinquent Tax

The easiest way to remove a tax lien is to pay off the delinquent tax debt. Often, you can arrange a direct debit installment agreement with the relevant tax authority to pay your taxes. Paying off any property tax liens before listing the property for sale will simplify the selling process.

To make sure you pay the entire amount of taxes owed, contact the taxing authority to get the exact amount needed to satisfy the lien, including interest and penalties. You can pay the lien amount in full or set up a payment plan with the taxing authority. Some homeowners take out a temporary personal loan (expecting to repay it from the property’s proceeds) or use savings to cover the lien.

Once the lien is paid, request a lien release from the taxing authority to clear the title. Make sure that you follow up with them to ensure it is completed in a timely manner. Clearing the lien before listing your home can make it more attractive to potential buyers, as there will be no complications at closing, which can result in a higher selling price.

Pay Off the Lien Amount at Closing

If you cannot pay off the lien before selling and can’t get a Certificate of Discharge to move the lien to another asset, you can arrange to pay it from the sale proceeds. Keep in mind that you will need to disclose the lien to buyers, which may lower the property’s desirability. Buyers perceive outstanding income taxes or tax debt owed as a potential risk when buying a property.

Be prepared to prove to buyers and their agents that there will be enough proceeds from the sale to pay off all debts and that the property will be transferred with a clear title.

The process of paying off a tax lien at closing is as follows:

• Inform the Closing Agent: Notify your closing agent or escrow company about the tax lien. They will ensure it is addressed during the closing process.
• Settle the Lien at Closing: The closing agent will use part of the sale proceeds to pay the lien amount directly to the taxing authority.
• Close the Sale: Once the lien is paid, the remaining sale proceeds will be disbursed to you, and the sale can proceed as planned.

While waiting for the debt to expire is technically an option, it’s usually better to address the lien proactively to avoid long-term financial and legal consequences.

Wait for the Debt to Expire

Tax liens do not last indefinitely. The expiration of a tax lien depends on the type of lien and the governing laws of the taxing authority.

For example, Federal tax liens issued by the IRS generally expire 10 years from the date the tax was assessed. This period is known as the Collection Statute Expiration Date (CSED). The expiration period for state income tax liens varies by state. Typically, these liens last between 5 to 20 years, depending on the state’s statutes. Property tax liens generally last from 5 to 20 years.

While waiting for a tax lien to expire might seem like a potential solution to avoid immediate payment, it often comes with significant consequences such as:

• Increased interest, penalty, and fee charges.
• A significant negative hit to your credit score, making it more difficult to obtain loans, credit cards, or favorable interest rates.
• Wage garnishments, bank account levies, or seizing other assets.
• Being unable to refinance the loan on the property.

In some cases, taxing authorities can renew liens before they expire, extending the period during which they can enforce collection. This can result in the debt persisting much longer than anticipated. It is not advisable to wait for tax debt to expire as a strategy to sell your house with a tax lien.

What If the Tax Lien Exceeds What You Earn from the Sale?

Even with the best intentions and strategies, it’s possible to find yourself owing more on the tax debt that you will earn from the property sale proceeds. In these scenarios, you have a few options:

• Negotiate with the Tax Authority
  You can negotiate with the taxing authority to settle the tax debt for less than the full amount owed. This is known as an Offer in Compromise (OIC). The IRS and some state tax authorities offer this option if you can demonstrate that paying the full amount would cause financial hardship. Alternatively, the tax authority may accept a partial payment from the sale proceeds and agree to release the lien, allowing the sale to proceed. The remaining debt would then be paid off according to an approved plan.
• Seeking Alternative Financing
  Some sellers obtain a personal loan to cover the shortfall between the sale proceeds and the tax lien. This can help clear the lien and complete the sale, but it is essential to ensure you can manage the loan repayments.
• Bridge Financing
  A bridge loan is a short-term loan used to cover immediate expenses until longer-term financing is available. It can provide the necessary funds to clear the lien and facilitate the sale.
• Bankruptcy
  In extreme cases, filing for bankruptcy might help discharge some of the tax debt or reorganize your finances. However, this has significant consequences and should be considered as a last resort.

If you find yourself in a situation where you have a tax lien on your property, the best solution is to address it quickly. Letting a tax debt sit will only cause it to grow. Addressing the lien promptly prevents further accrual of interest and penalties.

Ensuring a Successful Sale Despite Tax Liens

If you find yourself burdened by a tax lien, it’s crucial that you understand your obligations, how much you own, and the best way to pay the debt. Whether you’re disputing the lien, negotiating with the tax authority, or seeking alternative financing, taking proactive steps is crucial to ensure a successful sale.

Given the intricacies, cost, and risk involved in selling a property with a tax lien, consulting with real estate professionals and tax advisors is essential. They can provide tailored advice and guide you through the process, helping you make informed decisions and avoid potential pitfalls.

Start with FastExpert to find an expert agent in your area. Search through a network of professionals to find a local real estate agent equipped to handle the unique challenges of selling a home with a tax lien, ensuring a smoother and more successful transaction.

Don’t let a tax lien hold you back—reach out today and take the first step towards resolving your tax issues and selling your home with confidence.