If a tax lien has been placed on your house, it can cause a lot of problems. There are a few ways that you can try to remove tax liens. One of the most popular is to sell your house.
But this won’t be a straightforward process. Here are some of the things to know about selling a house with a tax lien.
What Happens if the IRS Puts a Lien on Your House?
It’s important to begin by talking about what it means when the IRS puts a lien on your home. This gives them the right to seize your property. There are a few types of tax liens to explore, these include:
- Property taxes. This is because of unpaid property taxes.
- Federal tax lien. As the name suggests, this is because of unpaid income taxes. You’ll owe this to the IRS and the federal government.
- Judgment lien. This is put in place by debtors, like banks or mortgage lenders. They can also be put in place by credit card companies.
Each of these will have a slightly different set of rules. For example, a credit card company will need to go to court to apply for a judgment before they can put a lien on your home.
It should also be noted that federal tax liens will continue to accure interest until you have settled the debts. Because of this, it’s best to try and settle the issue as quickly as possible.
There are a few common elements that these liens share. Most importantly, that they make it difficult to sell your property. You will still be able to contact a real estate agent and put the house on the market.
But unless you get the IRS to discharge the lien, you will be prevented from closing the deal.
Discoverability of the Lien
It should be noted that some people try to keep the lien hidden. They don’t want it to act as a stain on their reputation or hinder the home sale. However, this is misguided.
It will be easy to discover if there is a lien on your property. It is a matter of public record. All the real estate agent has to do is perform a title search.
How Long Does an IRS Lien Last?
It should be noted that federal tax liens can only be imposed for a limited period. Often, this will be ten years. Though some counties might allow them to last for 20 years.
However, it isn’t a good idea to sit and wait for the lien to be lifted. In many cases, the IRS gets them extended. Even worse, if you haven’t paid within the time frame, they might opt to take more action. This can include seizing your home.
How to Get Rid of a Tax Lien?
Before you can sell your house, you will need to deal with the tax lien. If you don’t, you won’t be able to close the deal. There are a few ways that you can remove a tax lien.
Pay Back Your Tax Debts
This is the ideal option, though it requires you to have substantial equity in your home. In this case, you will need to sell your house. The profits of the sale will be used to pay tax debts and any remaining mortgage payments.
As an example, imagine that you sell your house for $250,000. You have a $150,000 mortgage and a $45,000 tax lien. In this case, the profits of the sale will be enough to clear your debts.
However, it should be noted that you will need to clear the lien before you can close the sale. You’ll often need to use the services of a closing attorney to do this. In this example, they’ll make sure that the tax office receives their $45,000 and release the lien. This allows the sale to proceed. It should be noted that you will have to pay the full amount that you owe. When you pay back the debt, it will take around 30 days for the IRS to lift the lien.
At other times, the IRS might be persuaded to release a Certificate of Discharge. This is designed to allow the property to be sold, so you can pay off the debt. This can also be used to help you pay the interest on the debt.
But you will still be responsible for paying off the balance. If you are unable to pay, the government could sieze your personal belongings.
A third way of paying the tax debt is by taking out a personal loan. This is the least preferred option, as it will put you into more debt. But at least you can get the IRS off your back and sell your house. This will give you some money.
Setting Up a Payment Plan or an Offer in Compromise
Another way to clear the lien so you can sell the house is by setting up a payment plan. You will be able to pay off your debt in monthly instalments. While this is better than doing nothing, it can take a while to clear the debt.
Another option is to get an Offer in Compromise. This means that you will be able to pay less than you owed. In exchange for payment, the IRS will lift the tax lien.
However, qualifying for this agreement can be difficult. They will look at your income taxes and earnings, to decide whether you have the capability of paying off the whole debt.
Disputing the Lien on Your Property
Sometimes, you will be unlucky enough to get stuck with a lien on your home because your name is similar to someone who doesn’t pay their back taxes. If this is the case, you can dispute the lien with the IRS.
Though this will be an expensive process. You’ll need to hire a tax attorney before they will take your claim seriously. But it will be worth it to get rid of a wrongful lien.
Filing for Bankruptcy
Finally, you might want to consider filing for bankruptcy. This is a worst-case situation. But it will stop your debtors from repossessing the property. But you will still owe the debt to the IRS. You can find out more about Chapter 13 bankruptcy here.
Conclusion
If you have a house with a tax lien, it can make selling the property difficult. You won’t be able to close until the lien has been discharged. There are a few ways that you can do this, depending on the amount of equity you have in the property. For example, you might be able to get a Certificate of Discharge or work with a closing attorney to satisfy the IRS and allow you to sell your house. If not, you might need to turn to other means to discharge the lien, like taking out a personal loan or filing for bankruptcy.