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Contrary to popular belief, you can still sell your home even if a sale won’t produce enough funds to pay off your attached federal tax lien in full.
IRS offers a couple options for a lien discharge in this situation:
If a sale of the real estate satisfies some of the tax debt owed, under 6325(b)(2)(A), IRS will issue a discharge of the lien for a partial payment.
If there are no proceeds at all available in the sale, under 6325(b)(2)(B) IRS may issue a when it is determined that the government’s interest in the property has no value.
In both cases the remaining tax debt is also still owed by the taxpayer, but the property will be able to transfer lien-free to the new owner.
While these options exist, they do involve a complex process of their own involving plenty of paperwork, and strategic timing. Very few real estate professionals will understand what is required or how it needs to be handled. If you have a property sale encumbered by federal tax liens or other debts exceeding the home’s value, it is imperative to hire the right professional.