If the pandemic, recent inflation or other financial trouble upended your budgetary plans, it’s possible you missed some property tax payments in favor of putting your money toward food and shelter. If so, your city or county government could place a property tax lien, or legal claim, against your home.
Additionally, if you’ve fallen behind on your federal income taxes for 3 years, the federal government can file its own lien against your home.
Either way, it’s important to understand the ramifications of selling your home with an existing lien. Let’s take a look at what it means to have a tax lien on your home and strategies available to home sellers.
Can You Sell Your House With A Lien On It?
You can sell your home even if a government body has filed a tax lien on it. Selling your house might even be a way to pay off the taxes you owe. If you sell your property for enough money, you might be able to pay off both your mortgage lender and the government filing the tax lien.
Note that the IRS and each state have their own laws and regulations on how tax liens are handled, and you can’t simply sell your home if they’ve placed the lien on your property. We’ll discuss this in more detail below.
Homeowners with enough equity in their home – the difference between what they owe on their mortgages and what their home is worth – might choose to sell their homes and then pay off their back taxes from the proceeds of the sale. It’s one way to pay off unpaid taxes, though this method does require that homeowners sell their residence even if they’d prefer to stay in their home.
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What Is A Tax Lien On Your Home?
A tax lien is a claim made on your property from either the IRS or state, local or federal government because you have not paid your property or income taxes. This includes real estate, which means you cannot sell or profit from your home equity until you’ve paid back your debt. You also cannot refinance your mortgage loan until you’ve paid those taxes. You may have property, state or federal tax liens on your home depending on the type of back taxes you owe.
Governments file tax liens against your home when you haven’t paid any taxes you owe them. If you didn’t pay property taxes, your city or county government can file a lien against your property.
It’s important to note that a tax lien doesn’t mean that a government body has taken over your home. Instead, liens are a way for governments to make sure they will get paid if you do sell your home. However, if you ignore a property tax lien long enough, your city or county government can take your home through the foreclosure process.
The same is true if you owe the government other kinds of taxes. If you have a tax lien filed against your home by the IRS, this agency can seize your home if you ignore your debt for too long. There are ways to avoid this, though. One of the more common methods to remedy this is selling your home and using the proceeds to pay off these liens.
Types of Tax Liens
There are three main tax liens that government bodies can file against your home. Let ’s take a look at the reasons for these types of liens:
- Property tax lien: If you fail to pay your property taxes, the city or county government in which your home sits can file a property tax lien against your home.
- State tax lien: If you owe state income taxes to your state’s Department of Revenue, your state can file its own tax lien against your home. You can remove this lien by paying your state what you owe.
- Federal tax lien: The IRS can file a tax lien against your home, too, if you fail to pay your federal income taxes.
How Property Tax Liens Affect Home Sales
A tax lien doesn’t prevent you from selling your home.
While you can sell a home with a tax lien filed against it, it’s not an easy process. If you can pay off your tax debt before you list your home or convince a government body to discharge it, that might be a better solution.
Liens Won’t Prevent You Putting Your House On The Market
There’s nothing stopping you from listing your home on the market even if a government body has filed a property tax lien against your property. In fact, putting your home on the market and selling it is one way to pay back the taxes you owe.
A Lien Could Impact Closing On Your Home Sale
Depending on how much you sell your home for, a tax lien might not prevent the final sale of your home. If you can sell your home for enough money to pay off what you owe on your mortgage and what you owe in unpaid taxes, you can pay off your mortgage lender and the government to which you owe taxes. This would remove the lien from your home and clear your final home sale.
If you don’t have enough equity in your home, you might not be able to sell your property for a high enough figure to pay off both your remaining mortgage and your unpaid taxes. If this happens to you, you’ll either have to pay off your taxes before you sell your home or ask the government body you owe to discharge your tax debt.
How To Pay A Property Tax Lien
There are different strategies you can take to pay off a property tax lien.
Sell Your Home To Cover The Tax Debt
If you have enough equity in your home to cover your property taxes, you can satisfy your tax debt when you close the sale of the property. You’ll also be able to pay off your mortgage balance and closing costs.
Let’s say your home is worth $200,000 and you owe $100,000 on your loan. Also, let’s say you have a tax lien of $30,000 on your home filed by your county government because you haven’t paid your property taxes. If you sell your home for $200,000, you can use the extra money to pay the $100,000 balance on your mortgage loan and the $30,000 you owe on taxes.
That would leave $70,000 left over. Remember, though, some of that money will be eaten up by the fees your real estate agent charges and any closing costs you must pay.
The challenge comes when you don’t have enough equity to pay off both what you owe on your mortgage and your tax lien. If you sell your home for $200,000 but you owe $180,000 on your mortgage and you have a tax lien of $30,000, then that $200,000 sales price won’t cover both of these debts.
If you don’t have enough equity, then you’ll have to rely on a different method to get rid of that tax lien.
Resolve Your Tax Debt Directly
The best option if you don’t have enough equity is to pay off your tax debt before you list your home for sale. If that’s the route you plan to take, you’ll have a few options to explore.
A Payment Plan
The IRS and other government bodies might be willing to set up a payment plan to allow you to pay off your tax debt in monthly installments. Paying off your tax debt can take time, depending on how much you owe.
Offer In Compromise
If your tax lien is filed by the IRS or your state for unpaid income taxes, an offer in compromise could help you eliminate your lien for less money. If the IRS or your state government approve your request for an offer in compromise, you can pay off your tax lien for less than what you owe. Say you owe $20,000 in unpaid federal income taxes. The IRS might forgive your tax debt after you pay just $10,000. Qualifying for an offer in compromise isn’t guaranteed, though. The IRS will look at your ability to pay, income, expenses and assets when considering your request.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, you’ll work with a bankruptcy judge to create a repayment plan to pay off your debts, often for less than what you owe. Entering into a repayment plan can keep the IRS or your state or local governments from seizing your property while you are repaying your debts. Once you fulfill your repayment plan, your debts will be discharged.
Using A Personal Loan
You might be able to take out a personal loan and use the proceeds from that loan to pay off your tax debts. You might have to shop around, though, as some lenders might not be willing to give you a loan if you have unpaid taxes.
How To Sell Your House With An Income Tax Lien
If you decide to use the proceeds from your home sale to pay your tax debt, there are a few different ways to go about it. Your approach can depend on the type of tax lien and which approach will help you resolve the issue quickly.
Let’s take a look at the options.
Subordinate Federal Tax Liens
Federal tax liens usually occupy the priority position in your debts. If there is a tax lien on your home, when you sell, the holder of your tax lien is paid first. Being in the first position on a lien means the lien holder would have the right to be paid before your mortgage lender. No lender will agree to refinance your home or provide funding to a prospective buyer, if they are not the first in line to collect their loan proceeds should you default on your mortgage loan.
To resolve this problem, you can ask the IRS to subordinate your federal tax lien. This doesn’t remove your lien but instead places it behind other creditors on your mortgage loan. To request subordination, file IRS Form 14134. IRS Publication 784 provides instructions for completing Form 14134.
Subordinating your tax lien, and placing it behind your mortgage lender, will allow you to list your home and close the sale.
Talk To A Tax Attorney About State Tax Liens
If you live in a state that levies income tax, your state can place a lien on your home until you pay any income taxes you owe. The laws regarding state tax liens will, of course, differ from state to state. If you can, consult an attorney familiar with your state’s tax laws. Of course, you can read them for yourself online, but your attorney will be much more familiar with your state’s actual practices for collecting back income taxes.
Get A Certificate Of Discharge From The IRS
You can also apply for an IRS Certificate of Discharge to remove a federal tax lien from your home. This removes your lien completely. The IRS won’t always accept your request for a discharge. It might, if you have other property subject to an IRS tax lien and this property is worth twice much as your tax liability.
Say your total tax lien is for $30,000. You’ll need to have at least $60,000 – or twice your tax liability – worth of assets subject to the federal tax lien after the IRS grants a lien discharge for your home.
Dispute The Lien
You can dispute a tax levy if you think you don’t owe the taxes the IRS claims you do. To do this, you’ll need to request a Collection Due Process (CDP) hearing with the IRS Independent Office of Appeals. During this hearing, you can dispute the amount you owe.
Wait For The Debt To Expire
The IRS generally has 10 years to collect on your tax liens. However, that doesn’t mean that a federal tax lien will automatically disappear after that time. The IRS can extend this 10-year period, meaning that your tax debts might hang around longer than 10 years. This means waiting for your tax liens to disappear is not the smartest strategy. Not only might they get extended, but a government body could move to seize your home while you’re waiting for your liens to expire.
Additionally, selling your home with a tax lien could be a challenge as you wait. Buyers won’t be responsible for paying off the liens on your home after buying your property. But if you don’t pay off the lien, there’s nothing stopping government bodies from seizing the property even after it’s sold. This could dissuade buyers from making offers on your home.
Will Tax Liens Affect Your Next Home Purchase?
Tax liens don’t show up on your credit reports and won’t hurt your three-digit FICO® Score. However, homeowners who have unpaid taxes are often struggling financially. Those struggles could include missed credit card and loan payments, which hurt their credit score.
Fortunately, it is possible to qualify for a mortgage loan even if your credit is less than perfect. Homeowners should consider their mortgage options after selling their current homes, especially if they have filed for bankruptcy or now have poor credit. There are plenty of loan types out there that can help people with damaged credit qualify for a mortgage and get into another home.
The Bottom Line
Although it may not be what you intended when you purchased your home, selling your house may be a viable solution to get hold of your finances and move into a new home that’s more affordable in your current financial situation.
Considering taking action and selling your home soon? There will be a lot to consider and prepare. To get started, learn how to get your house ready to sell in our Learning Center.
