“In this world, nothing can be said to be certain, except death and taxes.”
This quote is from a letter that Benjamin Franklin sent to French scientist Jean-Baptiste Le Roy regarding the newly ratified constitution of the United States. While the concept he alluded to existed long before Franklin himself, the publication of this correspondence made the quote a popular staple in American culture. Do you have a tax lien? Whether you have a property tax lien or a federal tax lien, the process is similar.
How Can I Sell My House With a Tax Lien?
As an adult, you will inevitably be faced with an accumulation of taxes over the course of your lifetime. These taxes can range from income tax and property tax to inheritance tax, capital gains tax, and various other forms of taxes that could be specific to your profession or business.
It’s essential to focus on keeping your finances in check, which, of course, can be easier said than done. If you’ve found yourself falling into debt, you are most likely in a situation where you can only cater to your most immediate needs and necessary expenses. This means that a great deal of the debt you owe may go unpaid for quite some time, possibly even the tax on the property that you own.
If you’re in a situation where you need to sell your house but have not paid your taxes for an extended period of time, a tax lien will be placed against your property. Let’s explore if this lien affects your ability to sell your home.
What Exactly is a Tax Lien?
A tax lien is a claim on your property used as collateral to ensure that you satisfy your debt. You may have heard of a lien and are somewhat familiar with what it is used for, but perhaps you don’t know exactly how one works.
Similar to a foreclosure, a lien is specific to real estate and other property ownership. A lien is a form of security that a lender or tax authority may place over any property that you own but have not completely paid off at this time. The purpose of this lien is to help recover debts, or in this case, taxes that you owe to those entities.
Liens may also be placed on your property as a result of a court ruling. If this is the case, you have an obligation to clear any debt that you have accumulated. If you are not in a position to do so, then the entity that has placed a lien against your property will have the right to auction your property to recover the money that you owe them.
Keep in mind that a lien is not typically placed on a property immediately. There are three steps that need to take place before this happens.
- You will receive a bill: If you have arrears with your taxes, the authority you owe to will first send you a bill. This bill is based on the return you make, and it includes the taxes you owe and the penalties and interest that have accumulated up to that point.
- You will receive a second bill: If you do not respond to the first bill you receive, a second one will be sent to you. This bill will include any interest and penalties that may have accrued.
- Your debt will be reported to collections: Having now received two previous bills, it is your responsibility to pay off your past-due debt accordingly. If you do not, then the tax authority will take further action to collect the money that you owe, including any interest and penalties. This process can include using your tax refund to pay for the tax due until you can clear your pending debt or possibly even seizing any other property or assets that you may have. In most cases, a revenue officer will make an unscheduled visit to either your home or business to discuss steps for collecting the money that you owe.
If it does come down to a situation where the tax authority places a lien on your property, the lien placed will either be one of, or a combination of, these three types:
- Property tax liens: For every property that you own, there is an associated tax. If you own a house, you will also have to pay a tax on it, which is known as property tax. If you don’t fulfill your obligation, the city, or the county that you live in, will place a tax lien on your property.
- State tax liens: Just as the city or county you live in requires property tax, the state you live in also taxes you. If you have unpaid back taxes owed to the state, then a lien will be placed against your property by either the federal or state government. This lien enables the government to secure the tax owed by exercising a legal right over your property.
- Federal tax liens: Once the IRS assesses your debt and puts your balance due on the books, they will send you a notice of a federal tax lien, which serves as a demand for payment. This lien protects the government’s interest in your property, and if you fail to pay off your debt in time, the IRS can exact a lien on your personal assets.
Although taxes are usually handled by government entities, this doesn’t mean that this issue will end at this point. A practice that’s prevalent with cities and counties is the creation of tax lien certificates against an individual’s property due to unpaid taxes.
A tax lien certificate can be sold to private third parties, or investors, in exchange for clearing the debt that you owe. Now, instead of owing money to your city, you owe the amount to a third party who has the option of foreclosing your home if payment is not forthcoming.
The opening you have here is that when the tax lien certificate is sold to a third party, you may have the ability to negotiate payment timelines and avoid your home going into foreclosure. This option is usually much better than government agencies that may be less flexible and understanding of your circumstances. Those agencies can also choose to foreclose on your home if you are not able to pay your debt in full according to the timelines that they set.
Can I Sell My Home With a Tax Lien Against It?
The short answer is, yes! However, there are some things that you will have to consider if you are going to be successful with this endeavor. For starters, it is not possible for the property to change hands while there is a tax lien against it. While you can place your house on the market to sell, you will have to clear the debt you owe before any sale is finalized.
What you can do when you put your house up for sale is add the amount of your tax lien to the selling price of the home. This option works well in an area where the market is currently favorable towards sellers. You should note, however, that the housing market is not immediate. It may take anywhere from three months to a year before you even find a buyer that’s interested in your home.
One downside with this course of action, in particular, is that when you add the amount of the tax lien onto the price of your home, this may reduce the number of people who would be willing to buy it. Adding your debt to your house’s selling price may make it priced above average compared to other similar homes in your area, which can easily drive away potential buyers.
In many cases, a buyer will attempt to use this lien to knock down the current price of the home. Others may be worried that the attached debt could signify that the house was not well taken care of, which could lead to you losing potential buyers as well.
In some circumstances, it may be best to set the price of your home normally but then use the sale proceeds to pay off the tax lien on your property. Doing this will ensure that the buyer of your house gets a clean title, but unfortunately, you may have to end up taking a hit on the amount you make from the sale.
If you are unable to clear the lien on your property before selling your home, there are various options available to you.
What Options Do You Have?
- Pay the taxes
The first and best option available to you is to clear the taxes owed before you sign your property off to a new owner. If you have the money available, you could eliminate these taxes and get on with the sale. If, however, you are not in a position to do so, it would be in your best interest to find a way to work out a deal with the authority demanding payment of these taxes.
If you are dealing with the IRS, you will have the option of declaring bankruptcy under Chapter 13. This approach will allow you to negotiate and reorder all of the debts you have with your lenders under the supervision of a court of law.
This type of bankruptcy is best suited for people who earn a regular income and are willing to pay back all of their debts. A court-approved payment plan will allow you a period of three to five years to pay off your debts, clear the tax lien, and keep your property that you might otherwise lose.
- Dispute the lien
This option is best for the people who feel that the lien placed against them is not entirely fair or even justified. The first option you have is to go to the creditor themselves to try to clear up this issue. The best-case scenario is that they may listen to the dispute and be willing to release you from the lien.
If they choose to turn down your request, your next option is to take them to court so that you can argue your case in front of a judge. If you retain the services of a good lawyer, you can fight off the entire amount of the lien, or at the very least, get the amount reduced.
If the case doesn’t go your way, your last option is to seek a settlement. Going this route won’t remove the lien on your property entirely, but it will help you negotiate to pay back a smaller amount. Agencies will often opt for a settlement where they can receive part of the amount owed rather than not get anything at all.
- Apply for subordination
What you are basically doing with subordination is asking the revenue service to sell your debt to other creditors. Taking this course of action means that the burden of paying your debt is now transferred to these creditors while the revenue service still gets paid.
Fortunately, even though you will still owe money to the third-party creditors, you will now be able to sell your home without a lien placed against it. A subordination agreement will need to be processed and approved by your mortgage lender, and then the final documents must be recorded by a notary.
- Sell the home for cash
If you cannot clear the tax lien on your property because the amount owed is too large for you to pay out of pocket, selling your home may be your best bet. Since ongoing interest and penalties can add up quickly the longer that your debt is owed, it’s beneficial to put your house on the market as soon as you possibly can.
Selling your home to a cash buyer may mean that you make less money from the sale in the end, but there is typically a faster turn around time, less paperwork, and no obligation to make any costly repairs. Another upside to selling your house for cash is that cash sale funds are released to the seller very quickly, and a deal can often go through in as little as a couple of weeks.
While selling a home with a tax lien against it can be challenging, and there are plenty of financial matters and lots of legal red tape to navigate, it is possible.
If you would like a no-obligation cash offer on your home, click here.