IRS Tax Liens and Selling Your House

In these post-pandemic times, selling your house is already a difficult process, but having a tax lien on your home makes it even harder. You may be wondering, how large of an affect does a tax lien have on selling my house? Before we dive into that, let’s look at what exactly a tax lien is.

What is a Tax Lien?

A tax lien is a public legal debt claim used by the government when you have failed to pay off your tax debt. A lien may attach itself to all of your personal and business property that you hold ownership of while the lien is in place. Unlike a levy, a lien only secures the government’s interest in your property.  The IRS cannot physically take the property affected by a lien from you, which they would be able to do with a levy.

The most effective way to get rid of a tax lien is by paying your tax debt and all its interest and penalties in full. You want to act on a tax lien as quickly as possible as the longer you wait the more interest and penalties you will incur.

After you pay or settle your tax debt, the IRS tax lien will be released within 30 days of your payment. You may also set up a payment plan to settle your debt over time rather than all at once. Additionally, you can wait for the collection time period on the IRS lien to expire, but this is an extremely rare occurrence. If these are not feasible options for you there are still other ways to release your lien.

Can I Still Sell My House Even with a Tax Lien?

If you want to sell your house, but there is a lien on it, the tax lien must be removed before the sale. As previously stated, the lien may be removed by paying the debt in full, but what if you are unable to do so? If this is your case, you may be able to use the equity from your house’s sale to pay off the lien after the sale concludes. There are two situations under which this may occur.

The first situation is that your home’s sale generates equity. Even if the sale of your home doesn’t generate enough equity to cover your debt, the IRS still may come to an agreement with you to remove the lien in exchange for all the equity. This will leave you with no money from the sale. The second case would be that you generate no equity from the sale of your house. Even in this case, the IRS would still remove the lien on your home.

An example of the first case would be that you sell your house for $800,000 and your mortgage balance at the time of the sale is $600,000 and your closing costs are $20,000. At this time, you also have $300,000 in tax debt. The generated equity would be $180,000 and the IRS would take all of this in exchange for lifting the lien, leaving you with no money from the sale. This would be an example of the second case if the mortgage was $780,000 instead of $600,000.

If you would like to go through with this, there is a specific process which the IRS utilizes that you must follow. To have your lien removed, you must be able to prove that the price which your house sold for is not less than its market value. To do this, you must have your house appraised twice, once by a professional appraiser and the second by the tax assessor of the county which your house is located in. If you cannot access the latter your appraisal may be done by a member of a disinterested and unbiased third party.

To have your request for release accepted you must also present the requested documentation. You want to mail this documentation in as soon as possible as it may take the IRS up to 60 days to respond. This documentation includes a copy of your home’s sales contract, a copy of a title report of the home, a copy of the sale’s closing statement, a copy of the home’s deed, a copy of your tax lien, and you must file Form 14135, Application for Discharge of Property from Federal Tax Lien. The last item is not necessary if your house’s equity is greater than your tax debt. It is important that all these documents are copies as the IRS will not be sending them back.

How Delia Law Can Help You

At Delia Law, we will put in our best effort to help you remove your tax lien. Whether this be by helping you obtain an Offer in Compromise or an Installment Agreement, or by gathering relevant documentation to support the removal of your lien we will support you every step of the way.

Call us today at our San Diego Office (619) 639-3336, our Los Angeles Office (310) 494-0100, our Bethesda Office (410) 630-3336, or our New York Office (646) 862-2854 for a free consultation. You may also complete the form below to contact Delia Law for a no-cost attorney consultation.

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