Debt can always feel like an uphill struggle, but when a lien is put against your house, it can feel like the walls are closing in. Whether it’s from child support, outstanding income tax, or local property tax a lien can feel like a constant weight around your neck as interest and penalties compound further. Don’t despair, you still have one of the most valuable assets available to you to help you face these debts head-on; your home.
While it’s hard to think about, your home may be the best way to get you out from under the lien placed against your home. We’ve put together this brief guide to break down what a tax lien is, and what your options are for moving forward.
What is a Tax Lien and why was it placed on your Home?
Simply put, a tax lien is essentially a claim against your assets for your outstanding debts, your biggest asset being your house. When a tax lien is placed on your home, it means that you can’t sell your house and pocket any equity from the sale until the debt associated with the lien is paid off. There are several different types of tax liens:
- Property Tax Liens: These liens are placed on your house for unpaid property taxes that are due to either the county or city in which your house resides.
- State Tax Liens: These liens are levied on a house by the state in which you reside and are placed on the property due to back taxes that you owe to the state department of revenue. In the case of NY, this would be the department of taxation and finance.
- Federal Tax Liens: These liens are placed on your home as a result of unpaid income taxes owed to the IRS.
Most of the time, you’ll be dealing with the government at some level (local, state, or federal) to resolve your tax lien on your home. However, with property tax liens, things can get a little tricky. Sometimes, your city or county will sell your tax lien to a private investor. Then, if you fail to pay off the lien, that investor can foreclose on your home as repayment for the debt. However, there is a silver lining, the investor may be willing to compromise on the payment timeline or the amount owed.
Tax Liens are a Silent Killer in Real Estate
Just like credit card debt, or any other debt owed, when you have unpaid taxes, the government is going to charge you interest and penalties when you don’t pay by the due date. Failure to pay penalties can be extremely harsh, with some penalties going as high as 100% of your tax debt!
For example, let’s say you have a $4,000 lien on your property for unpaid employment taxes. You then incur that 100% penalty, now you’re up to $8,000! That’s before they tack on the 12% interest per month that you incur for each month the unpaid tax bill is outstanding. Let’s say the bill sits for a year without being addressed; now your $4,000 tax lien bill is over $15,000! As you can see, this debt can quickly erase any equity you’ve built in your home.
Now, the example above is a bit of an extreme case, not all tax debts are going to incur a 100% penalty on the taxes owed, but you should always expect some sort of fee or interest on late taxes. Like the failure-to-pay penalty for personal income taxes. The IRS will charge you .5% per month up to 25% of the amount of tax that is unpaid. Additionally, if you start paying it off, the IRS applies it to the taxes owed first before applying any money to interest and penalties. So, even after you pay off your unpaid taxes, you can still owe penalties and interest.
This is why it is crucial to handle tax liens on your property as soon as possible. If selling your home is the only way for you to pay off your tax lien, then you’re going to want to do it as fast as possible so that the ongoing penalties do not destroy any equity you have in your home.
Potential Options for Selling a Home with a Tax Lien
When you sell your home, your tax lien doesn’t go with the buyer. It’s your tax debt, which means you’ll need to deal with it before the sale can close. However, there are several options available to you.
Dispute the Tax Lien
If the tax debt that triggered the lien against your house is not yours, or you’ve already paid the lien off, then disputing is the smart play. However, disputing a tax debt is rarely easy.
For example, the IRS does not communicate tax disputes through email, they only communicate through snail mail and phone calls. Actually, if you’ve received an email supposedly from the IRS claiming there is a tax lien on your house; it’s more than likely spam. Additionally, most of the time the IRS won’t even work with you unless you’ve retained a qualified tax advisor, so make sure that you hire one ASAP.
In the case of the tax lien being filed against you in error, the IRS will withdraw the federal tax lien against your home, but you’ll need to follow up with a tax attorney to request an appeal, and you’ll need evidence to back up the claim that the IRS filed against you in error such as proof that the debt was caused by someone with a similar name to you.
In the case of having already paid off the lien, but the lien is still on your house after 30 days, you may need to file a request for a certificate of release before the home sale can close. You will need to present proof that the debt associated with the lien has been paid off.
Obtaining a Certificate of Discharge
Another potential option is to request a certificate of discharge.
A certificate of discharge will detach the lien from your house so that it can be sold, however, you still owe the tax debt that incurred the lien in the first place. You are still responsible for paying those back taxes to the IRS, and other personal property or assets can be seized to satisfy the tax lien instead of the home.
Pay the Debt Associated With The Lien
If you know that you owe taxes to the city, state, or the IRS, then you’ll need to pay off that debt before you can sell your home. If you don’t have the cash in savings to pay it off, there may be other financial options available to you.
It’s possible that you can pay off the lien with a HELOC (home equity line of credit) before you sell the house, but this is only worth it if you have a lot of equity built up already.
Additionally, you can’t wait to use the equity from the completed home sale to pay off the lien, unless you make arrangements to do so. Which means, unless you make arrangements ahead of time, the lien will stop the closing.
Pay off the Lien at Closing
While you as the seller have the option to pay the lien off on your own before closing, you are also responsible for obtaining the lien release and presenting that before the closing. However, this can be extremely time-consuming as well as hold up the entire closing process.
One of the more common solutions is to pay the lien at closing with proceeds from the sale. I know we just mentioned above that the lien will stop a closing unless you make arrangements ahead of time. This is how you make those arrangements.
Let’s say that Joe Smith has a mortgage on their home for $150,000. They can sell their home for $200,000 but they have a Federal Tax Lien of $30,000. Joe’s attorney can arrange for that $30,000 to be paid out of the proceeds of the home sale at the time of closing.
This is how the closing and the lead up to closing will play out: Joe’s lawyer submits payment to the IRS for the full amount, the IRS files a release of the lien. Once that tax lien and the mortgage are both paid, the amount due to the home seller at the time of closing would be $20,000 (minus any realtor commissions and any buyer credits).
Wait for the debt to expire (This Will Most Likely Not Happen)
If you have a federal tax lien that has lasted nearly 10 years, then it might behoove you to wait until the 10-year statute of limitations expires on the lien. This will free you from the lien without you having to pay it off.
However, the likelihood of this actually happening is very slim. Come hell or high water, Uncle Sam will get his money, no matter how long it takes. While some local governments and the IRS might let it slide if the tax lien is a small amount, however, more than likely the party that created the lien in the first place will file suit against you for collections. When the IRS or another local government files suit, it reduces the claim to a judgment. This means that the penalties and interest will stop as your debt amount is locked by the judgment. However, this also removes the statute of limitations and the judgment will remain in place until it is paid in full. Additionally, judgments are reported to the credit bureaus and can wreck your credit.
What if my Tax Lien is bigger than what I sold my house for?
If the proceeds of the home are not enough to pay off your mortgage and the tax lien, don’t just assume that Uncle Sam will take the rest of the debt through a payment plan.
If you can’t cover the lien with the proceeds of the house sale, you’ll have to bring the difference to the closing to pay off the lien in full. If you can’t come up with the cash to cover the difference, then bankruptcy might be your only option. While this won’t clear your tax lien debt, it will make sure that the lienholder gets paid.
Tax Lien Debts Are Nothing To Ignore
Getting notification of a tax lien on your home can make you feel like you’ve fallen into a debt pit that you can’t climb out of. Don’t let yourself be buried by this tax debt. Denial and procrastination won’t make the taxman go away, if anything, it’ll make the problem worse. The sooner you deal with a tax lien, the better off you’ll be.
If you’re looking to sell fast, but are worried that your tax lien will prevent you from selling. We have options that might help you get out from under that debt.
DISCLAIMER: This information is to be used as a helpful guide, not as legal or professional tax advice. If you need legal help with a tax lien, please consult an attorney or tax advisor in your area.