A federal tax lien usually does not prevent you from selling your house, but it can complicate the home sale process, particularly if you do not have enough equity to pay off the tax lien. Even in that situation, however, you have a number of options, so do not think the house sale won’t happen. Here are the most important things you need to know about selling a house with a federal tax lien.
What Is a Federal Tax Lien on My House?
A federal tax lien on your house is a legal claim against its value made by the federal government in response to an unpaid tax debt. Let’s say the IRS claims you owe $50,000 in back taxes. They will first try to collect your tax debt by sending notices and calling you. If that is unsuccessful, they will often resort to more forceful methods, one of those being a federal tax lien.
When the tax lien is placed, the IRS effectively has their name on $50,000 worth of your house. This means when you sell your house, $50,000 of your home’s equity goes to the IRS before you see a dime.
Can I List My House for Sale if I Have a Federal Tax Lien?
A federal tax lien does not prohibit you from listing your house for sale. Before you do so, however, you should speak with a tax professional to get an idea of how the tax lien might affect a potential sale. You do not want to go through the entire process of negotiating and finalizing a home sale, only to have it fall apart at the closing table because of your federal tax lien.
Can I Close on My House Sale if I Have a Federal Tax Lien?
If you have enough equity in your house — meaning the difference between what the house is worth and what you owe on it — to pay off the federal tax lien, you can close on your house. Understand, however, that your proceeds from the sale will be reduced by the amount of the tax lien.
If your equity is insufficient to pay off the federal tax lien, you might not be able to close until you make arrangements with the IRS to settle the tax lien. We can guide you through the process if you need help here.
How Can I Reduce the Impact of a Federal Tax Lien When Selling My House?
To reduce the impact of a federal tax lien when selling your house, you should attempt to settle the tax lien with the IRS before you list your house for sale.
You have several options:
Dispute the Tax Lien
If you believe the federal tax lien was filed in error — for instance, you do not owe the taxes the IRS claims you do, or you owe less than what they filed the tax lien for — you should dispute it with the IRS. You can do this by requesting a Collection Due Process hearing. At this hearing, you can present evidence of why the federal tax lien is incorrect.
Remove the Lien by Resolving Your Tax Debt
You can resolve the tax debt by either paying the full amount you owe the IRS, setting up an IRS payment plan, or submitting an Offer in Compromise. The IRS will consider an Offer in Compromise to settle your tax debt for less than what you owe if your offer shows you lack the financial resources to pay the full tax debt. A tax professional can help you decide which Fresh Start Tax Relief Program is best for you.
Apply for a Certificate of Discharge
A Certificate of Discharge removes the federal tax lien from your home. The IRS will often grant a discharge if you have comparable property to which they can transfer their claim.
Apply for a Certificate of Subordination
A Certificate of Subordination allows another creditor — in the case of a home sale, typically a bank or mortgage lender — to move ahead of the IRS in the payoff process. This will allow a home sale to go through even with an active federal tax lien.
Apply for Withdrawal
A withdrawal removes the federal tax lien from your property and allows you to sell your home, but it does not erase your tax debt.
How can Wiztax help?
An IRS expert at Wiztax can help you choose the best tax relief services and resolution option for your situation. Call us today at (866) 568-4593 to learn more about how we can help, or start here to take our free online evaluation. Regardless, we promise to save you thousands in fees.
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