Tax Lien

Selling A House With Back Taxes – A Full Guide

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There are lot of reasons that someone gets behind on their home taxes, and they very rarely have to do with some deep and terrible problem. Often times it’s due to an inherited home that comes with back taxes or a life change like a divorce. Whatever the reason, it’s possible to sell a house with back taxes to get out from under the burden.

A clear home title

In order to sell a house, the title on the property has to be totally clear of any liens. This includes liens from creditors like mortgage companies and also government liens. 

When someone owes money to the IRS, it’s possible that the federal government will set a lien against their house for the money owed. This is because a house is a piece of real property that the government can count on to get their money back. This process is fairly automated, so you can expect it to happen if you owe taxes. 

Many homeowners are surprised to find out that the money they owe to the IRS has been applied to their house. It’s a nasty surprise to find this out when you get to closing on your home! 

The lien is not able to be assessed until the IRS files something called a Notice of Federal Tax Lien with the Secretary of State in your state or with the register of deeds in the county where you live. This is how people are notified of the lien, and it’s how a title search is able to find out about the tax lien.  

The government is relentless

When the IRS assesses a tax liability against you, they can put a lien on anything that you own. That applies to your house, but also to any property in your name. Cars, boats, some kinds of businesses – anything. The federal government is going to get what it’s owed, one way or another. This kind of debt is unlike any other sort of debt that you might owe.

It’s not just the IRS. Property taxes that are owed to any government agency are the first on the list of debts that must be paid. A lien against your home from any government agency is similar to a federal tax lien. In all cases, this kind of debt must be taken care of before any other action can be taken on the house. 

Options for selling with a tax lien

Unpaid property taxes on a home

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Though the lien has to be taken care of, that doesn’t mean it has to be paid directly before you can sell your house. You can make headway by taking care of your taxes in all sorts of ways, not just by paying them in full before you list your house. 

All of these options involve negotiating with the tax authorities to sell your house. Homeowners who owe back taxes have to make provisions for the money that they owe in order to sell. You either have to pay it upfront or negotiate to pay it on the other side. 

Option 1 – Close with enough cash

The first and easiest option to sell your house with a tax lien is to get to closing with enough cash to pay off all the debts. If your selling price is high enough, you can pay off all of the liens owed on your house. 

Working with a real estate agent, you can factor in your taxes owed into the closing costs. You can also get a fair cash offer for you house and so settle the debt that way. Getting the tax bill paid at closing is a perfect way to settle your tax bill. Sale proceeds are used to pay the taxing authority.

Don’t forget that you’ll have to pay realtors fees as well. Assuming you can get market value for your house, you might not have enough equity to pay the mortgage balance and the back taxes. You can only sell your property if you can work with the government body to settle the back taxes.

Sometimes, homeowners will sell their house for a high enough price to pay off all of the liens on it and also to put money in their pocket. That’s obviously not what happens for everyone, but it’s certainly a best case scenario. 

Option 2 – Chapter 13 bankruptcy

If there is not enough money in the sale to cover the cost of the tax liens that are on the property, then the only option is to pay the taxes to the IRS before.  One way to do this is to file for Chapter 13 bankruptcy.

Through this process, you’ll be able to structure your debt so that you can pay it off. When you do this option, you might even be able to negotiate with the IRS to pay less than what you owe. An Offer in Compromise is a huge benefit if you owe back taxes. 

With this kind of restructuring, you can get a payment plan that will make it all work for you. An IRS lien is not going to go anywhere, but you can still get it all done in a timely manner. The sales proceeds from all of your assets can be folded in to balance the debt you owe. This can cover state taxes as well as taxes from any other government body. Your property is a fantastic way to settle the debts you owe.

Chapter 13 is emotionally difficult to engage in. It can feel like a massive failure to move forward with this decision, but it’s much better than the alternative. Chapter 13 restarts the clock on everything from credit card debt to mortgage payments to taxes. It’s a clean slate to rebuild from. 

Option 3 – IRS Subordination

IRS tax lien on a property

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This option is really part of option 1. With this process, the IRS agrees to put the money they are owed behind other creditors. They are able to make what you owe to them subordinate to what you owe to other creditors, namely the mortgage company.

Why would the IRS subordinate a tax lien? The reasoning is simple – they want to get paid. By putting their lien behind other debts, the house can sell and they can get their money. Even the federal government wants to avoid a tax sale if you owe back taxes. Make no mistake though – property tax liens only go away when you pay them. Even if you subordinate the debt, you still have taxes owed.

Option 4 – Work with an investor

Tax debt from federal income taxes

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Real estate is a booming business, and investors are always looking for homes to buy for cash. Working with a cash investor can be one way to get out from under a tax lien. 

Investors can resolve the debt in the process. After all, they can see that there is a tax lien through a title search. It’s not as though the money you owe is a secret. 

A cash investor can pay off the tax lien as part of the closing process. These buyers are often less afraid of deals that involve tax liens or home repairs than traditional home buyers. They’ll work with you to buy your house with back taxes. 

Getting a buyer to pay off the lien on a home is especially possible in a seller’s market. A cash buyer will sometimes pay the IRS or the municipal government upfront in order to facilitate the sale of the house. In a hot real estate market, this is even more possible. In return, there’s a credit on the home to cover the cost of the upfront lien.

Understand the possibilities

The takeaway for homeowners who owe back taxes here should be that it’s possible to sell a house with a tax lien. When you owe delinquent property taxes, whether it’s from unpaid income taxes or from tax debt that is associated with some other source, it’s a huge problem. A federal tax lien or a property tax lien can be part of the foreclosure process or it can be a legal claim from local governments. Whatever the reason, if you’re saying “I’m ready to sell my house”, then know that it’s possible!

Though you may want to sell your house fast, getting out from under your property isn’t likely to be as easy when you owe back taxes. If you have enough equity to cover the taxes, it’s much easier. You can work with a cash buyer or a real estate agent to get the options that are right for you. Don’t be afraid to check with a title company yourself before you get surprised.

This process might take a little more creativity and it might not be as easy as a traditional sale. It’s still a real option. Don’t feel overwhelmed by the process. Look over what’s possible and make a decision about the right way to take care of your tax lien.

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