How to sell real estate with federal tax liens - Reid Real Estate Group

How to sell real estate with federal tax liens

Need to sell your CT home but have a federal tax lien? The most notorious creditor of them all – IRS – has several ways to collect unpaid taxes, one of them by placing a tax lien on your real estate. A tax lien will make it more difficult to sell your property, especially if you owe more than your home is worth and can’t get the feds paid in full at resale, but there is always a way! 

What is a federal tax lien?

A federal tax lien is the government's legal claim against your property when you neglect or fail to pay your taxes. The lien protects the government's interest in all your property including real estate. However, when you need to sell, this lien ties up the equity in the home and must be addressed.

There may or may not be enough proceeds from a home sale to pay off the IRS lien at resale.

Picture of money owed

If there is enough equity; prior to close you will need a current payoff statement from the IRS, and at close funds from the home sale will go to pay off the IRS, and they will simply issue a lien release clearing the property of their claim against it.

But what if there is not enough equity to pay off the lien in full?

Then things get a little trickier, but there is still a solution. The IRS will in fact consider a partial payment in exchange for a lien discharge, when proven it is necessary to facilitate a sale. There is a process and some paperwork involved in this case. 

Keep in mind, this is not the same as settling your IRS debt. IRS has their own process for that and does not settle tax debt through property sales. They do however accept the partial payment to release the lien from the property so it can convey to the new owner. You will still owe the remaining excess IRS debt, but it will be cleared from the home you wish to sell.

You will want to make sure the professionals handling your property sale are well versed in dealing with federal tax lien issues. You will also want to get started far enough in advance of closing that there’s ample time to complete the process after contract but prior to close. IRS was never known for their speed or efficiency.

But what if there’s no equity at all?

house with debt photo

If you owe more on your mortgage(s) than your home could sell for, AND have a federal tax lien in addition to that, then things get even trickier. In this case you are looking at a short sale to deal with your mortgages, and with likely little or nothing left for the IRS, you will need for them to discharge their lien…for nothing.

This too can be done!  

Seeing as now you have multiple lien holders involved and several complex issues to sort out, you need some seriously expert help with this transaction and awesome timing to get this all done properly (pssst….that’s what we do!!!). Upon having the short sale approvals and the IRS lien discharge – you move forward to close as in any other sale. In a short sale your mortgage debt is generally always forgiven, but the IRS just releases their lien on the home, so you will still have to deal with the IRS at some later point.

Minna Reid

Minna Reid is Broker/Owner of Reid Real Estate Group. Reid Real Estate Group is a full service Connecticut residential real estate brokerage, specializing in helping homeowners with legal and financial challenges including short sales, probate sales and tax lien complications.

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