While the Internal Revenue Service allows many deductions for taxes, especially deductions for business and mortgage expenses, there is a limit to what can be deducted. A lien may not affect the requirements for tax deductions. Often, a lien is a sign of delayed or absent payment; if this payment is made and the associated expense qualifies for a deduction, then it can be deducted. The part the lien plays in the process, however, is minor and the lien itself cannot be deducted.
A lien is a legal claim against a secured asset, an asset used as collateral for a loan. A lien can be used in court to demand repayment on a debt, even if that payment has to be taken from another asset. A common example is a mortgage lien, which can be used to initiate a foreclosure. Construction workers may also file liens against property they worked on if they were not paid as promised. The lien itself, however, is created by a lender and does not have innate value, so it cannot be deducted from taxes.
Liens vs. Losses
A lien is not the same as a loss. A loss occurs when a business actually loses money that it has already earned. The lien is part of the legal promise, but a loss is directly related to income levels. A business can deduct losses on its taxes and it is a very common process, but a lien, while it may be used to prevent losses, is not the same thing and cannot be deducted by the lender any more than the borrower.
On the side of the borrower, if a lien is used to seize an asset but the asset does not fully cover the debt owed, the lender may forgive any lasting debt if it does not believe the borrower can pay. This occurs in many short sales where the value of the house does not fully cover the mortgage. Ordinarily, the forgiven debt would count as taxable income, but if the borrower is legally insolvent or qualifies for federal tax credits, he will not have to pay taxes on this forgiven amount.
Property Tax Changes
The government also can create liens against a property if property taxes are not paid. However, certain changes that are made through taxes and fees to sidewalks and nearby streets can raise the value of the home and therefore the property taxes owners have to pay in the future. In such a situation, owners may feel that they should be able to deduct this increased property tax amount, since they paid for the changes in the first place. Payments and taxes for such property improvement, however, are not tax-deductible according to IRS regulations.
- 360 Degrees of Financial Literacy: My Town Has Assessed Against Me a Real Estate Betterment for New Sewer Lines...
- John Michael Miller, CPA: Frequently Asked Questions
- The Money Alert: What Is a Lien?
- Internal Revenue Service: File a Notice of Federal Tax Lien
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sept. 29, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.