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There are lots of reasons that someone might get behind on their taxes. Whether it’s an issue of life circumstances or financial struggles, knowing how to sell a house with back taxes can lift homeowners out of a tough situation.
Selling your house is your right
It’s important to realize that you are well within your rights as a homeowner to sell your house when there is a tax lien on it. Owing back taxes does not tie you to a home forever. It doesn’t even tie you to the home until the taxes are settled.
It’s possible to sell a house, even if you owe property taxes. You can get a cash offer – a fair cash offer – and pay off any outstanding debt.
All tax liens against a house do have to be resolved before the home can be sold. That being said, there are lots of ways to solve them that don’t involve paying off those taxes.
A clear title is the goal
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A clear title means that there are no liens on the property. A lien is an amount of money owed to a creditor that is kept solvent by the piece of property.
Creditors use the lien process to ensure that they will get the money owed to them. Without the piece of property, there is no guarantee that they’ll get the funds back.
Whether it’s delinquent property taxes or a second mortgage, there are lots of potential organizations that could have a legal claim to a piece of property. The mortgage balance is one kind of lien against the property owner. Homeowners who are facing foreclosure have to deal with the mortgage as well as creditors.
What are tax liens?
Any claim against the value of a house is called a lien. A clear title is a title that doesn’t have any liens against it. To get a lien removed from a property, a lien release must be filed to formally take it off.
The goal of any homeowner who might owe enough money to have a lien against the title is to clear each and every lien. All liens have to be paid off or negotiated off, then marked by the creditor as satisfied. Only then can the process move forward.
Liens are immovable
A piece of real estate cannot be sold if there is an active lien. A title search will cause any potential creditors who have a legal right to past due money that a homeowner might owe. Until it is paid, there’s no selling the house.
How a tax lien is different
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A tax lien is something totally different. Taxes are owed to the federal, state, or local government, and they are immovable.
With almost every kind of lien, there is a lot of room to create a payment plan or to pay off less than the actual amount due. That is not the case with the IRS.
When a homeowner owes back taxes to the IRS, the sale of a house can be abruptly disrupted by the tax lien. Any kind of lien from the IRS is statutory, meaning it’s encoded by law. An IRS lien is basically automatic.
When the IRS decides there is a tax liability that you owe, they then notify you of that liability. If you don’t pay the taxes, they can come after your real property. The IRS is fairly ruthless in the sense that they will not slow down when coming after your property.
Not just the home
An IRS tax lien is not just about the home. If you owe past due taxes, the IRS automatically puts a lien against every piece of property you own. This includes, but is not limited to, real estate. When you owe taxes, the IRS is going to get those taxes.
Local governments and state taxes are also able to come with a lien against your home, but they are less virulent in their enforcement on the whole. Still, a title company will be able to find any kind of lien when they do a title search on the property.
The IRS will file a Notice of Federal Tax Lien with the office of the register of deeds for the state that you’re in. This filing is a public declaration that lets everyone know that the tax lien is now on the home. Any attempt at the home sale will immediately be stopped by the government.
Pay it off through sales proceeds
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Hands down, the easiest way for you to get your delinquent property taxes paid off is to pay down the tax debt with the sale proceeds. You just have to know how to sell a house with back taxes.
To do this, you have to get a fair cash offer that’s enough to pay the tax bill. The state’s department of revenue, if that’s the taxing authority you owe, will then clear the title of that debt.
If the IRS files a lien against you saying you owe back taxes, you’ll need enough equity to pat them off. When you sell your house, the price tag has to be high enough for the mortgage too. Keep in mind that there are fees and attorney costs to cover as well.
Paying off back taxes owed through the sale of the home is great if you can find the right buyer.
Examples of paying off back taxes
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Let’s talk through an example.
For instance, say I’ve got $50,000 left on my mortgage and I have unpaid income taxes in the form of a federal tax lien for $10,000. I might have multiple tax liens though. Let’s add in another $5,000 of property taxes in the form of a property tax lien.
If I owe property taxes and federal income taxes both, I’ll need to pay off both of those loans when I sell my house. Once the property tax liens and federal tax liens are cleared, I can walk away with no taxes owed.
Negotiating taxes owed
Maybe I’m able to work with a tax attorney and negotiate the back taxes. This is unlikely, but it does happen. Now the property taxes owed are just $4,000.
All in, I’ll need a total of $64,000 to pay off both my mortgage and the federal tax lien, and the property tax lien. I need enough equity when I sell my house to cover both of those costs. Selling my house for a high enough price to cover all of those fees could involve the use of a real estate agent or it could be a direct cast offer sale. Either way, the math is similar.
But wait, there’s still another consideration! The closing costs on a home, including things like the closing attorney fee and the title company fee, also need to be taken into account. It’s smart to budget for those as well when I sell the property. Let’s say another $4,000 in those fees. The closing process increases the amount I need to sell my house for.
Clearing a profit
I need a buyer who’ll cover at least $68,000 in costs to pay down all that I owe on property sale. Home sales can definitely cover that cost. If I am able to sell my house for a cash offer of $75,000, then I’ll walk away with $7,000 in profit. That’s not a bad deal at all!
When you can’t find a buyer
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What if you can’t find a buyer? Depending on your situation, that could mean you end up in the foreclosure process. If you owe delinquent property taxes, income taxes, or property taxes, you might need to sell your house fast.
The reality is that there is always a buyer for a home, no matter the condition or the specifics of the property. Selling a house fast might mean taking slightly less than market value, but the trade off is time for money.
In the case of someone who owes taxes, taking a lower price could mean saving money in the long run. The influx of cash from the home sale can put an end to interest accruing.
The IRS doesn’t sleep on delinquent taxes
Here’s the biggest problem – the IRS won’t stop coming for you. Even if you can’t find a buyer. If you owe back taxes and you can’t see an end in sight, it’s a good idea to talk to a tax attorney to explore your options.
The IRS is not one to negotiate, but there is a little wiggle room in many cases. Keep in mind, they want their cash. They don’t want to have to sell a house to get it. They absolutely will sell your house to get it, but that’s a headache for them.
If you owe delinquent taxes, the government is looking for their check. Unpaid taxes are notoriously impossible to get out from under.
Selling your house, but not for enough
What if you can sell your house, but not enough to cover the delinquent taxes? The IRS isn’t going to let you off the hook without paying your delinquent taxes, but there is still another option to remove the lien, pay the unpaid taxes, and clear the title.
Getting a subordination from the IRS
A subordination from the IRS allows you to put other creditors ahead of your tax lien. Depending on your situation, this could be a viable way to get out from under the tax lien, pay off other debt, and then come back around to the tax debt.
Note that a subordination does not remove the tax lien, so you can’t sell your house yet. You must remove the tax lien if you owe delinquent property taxes. Otherwise, you won’t be able to sell it with a cash offer or any other type of real estate transaction.
Getting an Offer in Compromise from the IRS
The only possible way to reduce your tax burden without paying those unpaid taxes is to get an Offer in Compromise from the IRS. In this scenario, they take less than you owe in tax debt and then forgive the balance of the amount.
Unfortunately, the surest way to go about getting an offer in compromise is to file for Chapter 13 bankruptcy. Through that process, you can lay out a plan with the IRS to pay down tax debt. There’s even a possibility that you’d be able to keep the property. If selling isn’t your end goal, this is a viable way to pay off what you owe in delinquent property taxes and still retain the real estate.
You may not be able to sell the property immediately if you go these routes, but you can potentially eliminate the tax lien without having to pay out of pocket.
Can you sell your house fast with a tax lien?
The silver lining here is that if you can sell a house fast, you can often get enough influx of cash to pay those delinquent property taxes in a timely manner. You can pay down the debt that you owe with the sale of the property.
If you can get an offer for more than the debt you owe, then you can absolutely sell your house fast with a tax lien. At the closing table, the whole process can be put together to both pay off the debt and to get the house in someone else’s name. Once the property sold is in someone else’s hands, you can walk away free and clear.
Getting out from under tax debt
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It’s a great feeling to get out from under a mountain of debt. Though it can feel like a dark situation when you’re stuck in the middle of it, the reality is that there is a way out. It’s hard to see when the IRS or state taxes are weighing heavily on you.
Once the property is paid off, you can put those funds towards looking after other assets. The lien isn’t the only consideration for most people. Once you’re able to clear every tax lien and sell your property, then you can look towards the next stage in your life. Whatever that might be.