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Editor’s Note: Hear from an experienced Realtor® on what to do if you are trying to sell a house with a tax lien.
How to Sell a Home with Tax Lien
by Greg Geilman. REALTOR®
Sometimes, people get behind on paying their taxes. Once the amount reaches a certain threshold, the taxation entity (e.g. the Internal Revenue Service) establishes a lien on property held by the person. Although handling a tax lien can be complicated, it is often still possible to sell the home as a way to reduce or eliminate the amount of the tax debt.
1. Where Are Tax Liens Prioritized?
Usually, taxes are a higher priority or must be resolved before the interest that others may have in the value of a home, such as the mortgage holder. Federal and state income taxes may be set as the primary lien. The difficulty occurs when the fair market value of the home, and the likely sale price, are not enough to cover the full cost of the tax lien and the amount of the mortgage combined.
In this case, the holder of the mortgage may not agree to the sale because they are in a position of lower priority for getting the existing loan repaid. If the sale price is more than enough to cover all liens on the property, including the mortgage, the sale might happen without any difficulty at all. However, since buyers are not usually pleased to discover tax liens, it is important to be forthcoming about plans to resolve a tax lien on a home that is already listed.
2. How Are Tax Liens Resolved?
The IRS does not typically settle a lien on property until a specific amount of tax debt has been reached, usually $5,000. The fastest way to resolve a tax lien is to pay off the money owed in full. However, taxation entities may be willing to withdraw the lien with agreement to other forms of payment, including partial repayment of the debt, the creation of a payment plan or the sale of the home. Under these circumstances, the IRS might remove the lien without full resolution of the debt.
3. Is There a Middle Ground?
In some cases, it is not possible for the homeowner to settle the full tax debt before they need to list a home for sale. In these instances, the goal might not be to repay all the debt but to change the nature of the tax lien. Buyers are reticent to make a purchase offer on a property with a lien that is not related to the mortgage, so the home could sit on the market without any offers for far too long.
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To resolve this, the IRS allows debtors to apply for a discharge of property, which excludes the lien from specific property types. Sellers could also apply for subordination of the lien, which would take the tax lien out of primary position and assure the lender that they will have first receipt on what is owed to them. The final option is withdrawal, where the seller acknowledges the unpaid debt, but the lien is withdrawn. There are specific qualifications required for acceptance of each application, and it is important that your client understands all of their options.
4. What If the Tax Lien Is a Mistake?
It is always possible that the tax lien was created in error, as a result of a tax debt that has already been paid or due to identity theft. If the owner suspects this may be an issue, they should contact the tax entity immediately. Proof of paid taxes and the verification of identity are required. The IRS says it will remove a lien within 30 days of notification that the debt has been paid or otherwise resolved.
About the Author
Greg Geilman is a Los Angeles native of over 40 years and owner of South Bay Residential.
About Working RE
Working RE is a national publication serving real estate agents and brokers, appraisers and home inspectors. WRE is published by the Organization of Real Estate Professionals (OREP), providing E&O insurance to real estate agents/brokers, appraisers and home inspectors for over 15 years.
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