To sell a house and convey clear title, all liens on the property must be paid and marked satisfied by the creditor. If you owe back taxes to the IRS, your sale may be disrupted by a tax lien on the house. An IRS tax lien is statutory and nearly automatic. If the IRS assesses a tax liability against you and notifies you of the liability but you fail to pay the taxes, the IRS automatically has a lien on everything you own (not just real estate). However, the lien is not truly enforceable until the IRS files a Notice of Federal Tax Lien with the recorder of deeds or Secretary of State, depending upon your state's recording laws. The Notice of Federal Tax Lien puts everyone on notice that the tax lien exists.
Property tax liens in most states also automatically attach to your house. If you owe delinquent property taxes, the taxing authority has a lien on the house to the extent of the back taxes. You can still sell the house if you owe back taxes, but you will have to deal with the tax liens before you can successfully close the sale. Only a few options are available to you if you have a tax lien but want to sell your property. Nevertheless, they remain accessible to most homeowners.
You are well within your rights as a homeowner to initiate the sale of your home while you still owe back taxes. That being said, any tax lien issues must be resolved through payment or negotiation before the IRS will allow the sale to be finalized.
Closing Your Sale
The easiest way to clear a tax lien and pass clear title in a real estate sale is to sell the property for enough money to pay all the liens in full. If, for example, your house is encumbered by one mortgage with a balance of $50,000 and a tax lien in the amount of $10,000, selling the property for $100,000 would pay off those liens and cover other closing costs for the sale, such as broker fees, transfer tax, and any outstanding water and sewer. However, if you can't obtain a buyer who will pay enough to cover everything, you'll need to consider other options.
Paying Your Taxes
If you can't sell your property for enough money to cover the IRS lien and the IRS will not grant a subordination, you will need to pay the taxes off on your own, or the buyer will need to do so. You may be able to seek a payment plan from the IRS or submit material for an Offer in Compromise (which means the IRS accepts less than what you owe and forgives the rest). You may also consider filing a Chapter 13 bankruptcy, in which you can propose a plan to pay the IRS over time. For property taxes, a Chapter 13 can help with paying taxes on the house as well. These options may not permit you to sell your property right away if the IRS does not agree to a subordination, but they are available as ways to reduce the tax debt and eliminate the tax lien.
Apply for a Subordination from the IRS
If IRS liens are the problem, the IRS may be willing to work with you to get the property sold even if you don't pay the lien in full. In some cases, the IRS may be willing to subordinate its lien to other creditors – that is, put itself behind other creditors so that they can get paid at the sale – and allow the sale to close. You may apply for a subordination as the property owner, or your mortgage company or other secured creditors (creditors with liens) may apply. The IRS will sometimes grant a request for subordination if it determines that, based upon the value of the house, it won't get any more than you're offering, and holding onto the lien is pointless. The tax lien is still attached to all of your other assets and you still owe the same sum. However, you can sell the house and pass clear title regardless.
- IRS.gov: Understanding a Federal Tax Lien
- IRS.gov: Publication 594 - The IRS Collection Process
- IRS.gov: Publication 1153 - How to Apply for a Certificate of Subordination of Federal Estate Tax Lien Under Section 6325(d)(3) of the Internal Revenue Code
- United States Courts: Chapter 13 - Bankruptcy Basics
- AllLaw: How Unpaid Property Taxes Can Lead to a Sale of Your House
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Sep. 18, 2020.
- Experian. "Tax Liens Are No Longer a Part of Credit Reports." Accessed Sept. 18, 2020.
- Experian. "What Affects Your Credit Scores?" Accessed Sep. 18, 2020.
- Federal Trade Commission. "Fair Credit Reporting Act 15 U.S.C § 1681," Page 22. Accessed Sep. 18, 2020.
Rebecca K. McDowell is an attorney focused on debts and finance. She has a B.A. in English and a J.D. She has written finance and tax articles for Zacks and eHow.