Maybe you forgot to pay your property taxes 2 years ago. If so, your city or county government could place a tax lien, or legal claim, against your home. Or maybe you haven’t paid your federal income taxes for 3 years. The federal government can file its own lien against your home.
You can still sell your home even if a government body has filed a tax lien on it. Selling your home 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 that has filed the tax lien.
But while you can sell a home with a tax lien filed against it, the process is not an easy one. 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.
What Is A Tax Lien On Your Home?
Governments file tax liens against your home when you fail to pay any taxes you owe them. If you fail to pay property taxes, your city or county government can file a lien against your property. If you don’t pay your federal income taxes, the IRS can slap a lien on your home. If you fail to pay your state income taxes, your state might file a lien on your home.
These tax liens are a way for government bodies to get the money you owe them. When you have a tax lien on your home, you can’t take any profits from the sale of your home until you’ve first paid off your tax debt. You also can’t refinance your mortgage loan until you’ve paid back those taxes.
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 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 too long.
There are ways to avoid this, though. One of the more common is selling your home and using the proceeds to pay off these liens.
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.
How Tax Liens Affect Home Sales
A tax lien doesn’t prevent you from selling your home. But it does complicate a sale.
Putting Your House On The Market
There is nothing forbidding you from listing your home on the market even if a government body has filed a 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.
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, either. 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 – the difference between what your home is worth and what you owe on your mortgage – 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.
Types of Tax Liens
There are three main tax liens that government bodies can file against your home.
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 To Sell A House With A Tax Lien
There are different strategies you can take to sell your home if it has a tax lien on it.
Sell Your Home To Cover The Tax Debt
If you have enough equity in your home, 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.
Say your home is worth $200,000 and you owe $100,000 on your loan. Say you also have a tax lien of $30,000 on your home filed by your county government because you’ve failed to pay 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. Say you sell your home for $200,000 but you owe $180,000 on your mortgage and you have a tax lien of $30,000. 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.
- 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. This 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.
Apply For Subordination
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.
Tax liens usually occupy the priority position in your debts. When you sell your home, then, the holder of your tax lien is paid first, before your mortgage lender. Subordinating your tax lien, and placing it behind your mortgage lender, could make it easier to sell your home and close the sale.
You can learn more about your eligibility for subordination by reading IRS Publication 784.
Get A Certificate Of Discharge
You can also apply for a Certificate of Discharge from the IRS to remove a federal tax lien from your home. This removes your lien completely. You can apply for a discharge here. The IRS won't always accept your request for a discharge. It might, though, 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 makes 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 disappear.
And 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.
Securing Your Next Home Purchase
Tax liens don’t show up on your credit reports and won’t hurt your three-digit FICO® credit 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 options for mortgages after selling their previous homes, especially if they have filed for bankruptcy or now have poor credit. There are plenty of mortgage products out there that can help people with damaged credit qualify for a loan and get into another home.