Tax debt can produce immense stress, especially when compounded with interest and penalty fees. If this issue festers enough, then you’ve got a nearly permanent burden.
This isn’t a problem you want looming over your head. The prospect of creditors knocking on your doors to collect is enough to haunt you for years, and not just financially.
But if you’re a homeowner with a tax lien, you have an advantage — specifically, your house. Liquidating this major asset can cover your losses if you want to use the equity from selling your home to pay off your debt.
Read on for a guide that will walk you through what a tax lien is, how to resolve it by selling a house, and actionable tips you can take to start lifting your burden today.
What Is a Tax Lien?
Liens are filed to gain possession of another person’s property and are not discharged until the debtor pays their debt. They’re filed either voluntarily or involuntarily, so liens aren’t always disciplinary in nature.
For example, a mortgage lien is filed in agreement with the homeowner so that they can live in the property while paying it off. There are consequences if the debt is not honored, but this particular lien is not initially posed as a punishment.
A tax lien is filed by governmental agencies to ensure that a debtor’s tax debt is fully paid. This lien is imposed involuntarily. This can result from a failure to pay taxes such as income or property taxes.
Until you have paid off your lien, you do not have the right to sell the seized property on your own accord. If you do not know how to start selling your home despite having a tax lien, you cannot receive the equity necessary to pay off your lien.
Types of Tax Liens
Tax liens can be filed for numerous reasons. Most commonly, they’re filed if you owe any taxes past the payment deadline. Here are three types of tax liens relevant for your case:
- Property tax liens are filed for unpaid property taxes owed to the county or city.
- Federal tax liens are filed for unpaid income taxes owed to the Internal Revenue Service (IRS).
- Judgment liens are ruled by the court for unfulfilled contractual obligations, giving the right to take possession of a debtor’s property to the creditor.
Different liens operate by their own penalties and rules. These can vary even further depending on the debtor’s state of residence. Understanding your specific lien can help you navigate the process of selling your home and paying off your lien.
The IRS releases federal tax liens 30 days after they are fully paid. Otherwise, they expire after ten years. The expiration date for city/county property tax or judgment liens depends on the jurisdiction and can climb up to twenty years. The IRS can also refile liens and in some states, creditors can renew judgment liens.
The longer you do not pay back your lien, the more interest you will accrue. The longer the debtor cannot pay their total back, the more penalty fees they will incur on top of their existing debt balance.
If the debtor continually fails to pay their debt, their creditor can press criminal charges that can result in imprisonment. In some cases, the IRS will offer voluntary programs that offer different payment options and avoid imposing criminal charges onto the debtor.
Guide to Selling a House With a Tax Lien
Although the initial terms of a tax lien prevent debtors from selling their home, there are ways to dispute the lien or otherwise navigate around it.
Obtain and Present a Certificate of Discharge
To release your property from a lien, request a certificate of discharge from the IRS. Although this will not entirely resolve your lien, a certificate of discharge will allow you to sell your property and use the equity that you received from the sale to pay off your lien.
Before you close your sale, present the certificate of discharge. The closing attorney will transfer the funds from the closing to your creditor to officially resolve the lien. Your creditor will then file for the lien’s release.
Sell Your House As-Is
Although renovations and minor maintenance repairs can boost a property’s value, sell your house as-is. Renovations are costly. They can prolong and complicate the process of selling a house with a lien.
During the time it takes to freshen up your entire house with a coat of paint, you could incur another month of interest and penalty fees. Depending on the state of the real estate market, you could find yourself waiting for some time before your house is sold.
For the sake of time, forget retiling your floors and sell your house as-is ASAP. Get your cash quickly so that you can free yourself of your debt in a timely manner.
If you think your home is in too poor of a condition to sell as-is, don’t worry. At iBuyer, we have a guide meant to help you sell your house, even if it has some cosmetic or maintenance issues.
Dispute Liens That You Don’t Need to Pay
If your lien was filed in error for whatever reason (most commonly because it was meant to be filed in someone else’s name), dispute it ASAP. Or you might’ve paid it off already, and still see that the lien has not been officially resolved.
Hire tax experts to handle these matters strategically. The IRS will most likely not even consider your dispute unless a tax advisor is mediating the conversation. If your situation requires legal assistance, then add a tax attorney to your team so that they can efficiently request a lien appeal and handle other legal matters.
Wait for Your Lien to Expire
Although you could wait out your lien’s expiration date, you are more likely to face harsh consequences by attempting to do so. As mentioned above, liens could be refiled and creditors typically do not allow the lien to expire before coming to collect. When they do, it’s usually because the debt balance is relatively low.
So if you’re waiting for your lien to expire, understand that you’re gambling with the government and your financial record. Use other available options to settle your lien and lower your chances of facing serious consequences.
Potential Issues That May Arise
If you wish to embark on this process, recognize potential pitfalls that can stunt your ability to sell your house and resolve your lien.
Lien Debt Costing More Than Property
If the equity you would receive from your sale still doesn’t cover your tax debt, first pay off enough of your debt to lower your lien. Do this before you file for discharge. You won’t be able to sell your house to pay off your lien until it is sufficiently lowered.
You cannot make a partial payment for a tax lien with your property, since your lien was filed against your property to ensure that your debt is paid fully. If you cannot conceivably lower your lien enough to sell your house, then you’ll most likely have to file for bankruptcy. Your house is probably your largest asset and if it can’t pay off your debt, then you don’t have many other options.
After filing for bankruptcy, the lien on your property will remain, rendering you unable to sell or auction it. But your creditors will get paid, easing the burden of your debt. Make sure you understand your options before committing to a bankruptcy filing.
Although you may feel embarrassed about having a lien on your record, you could complicate things by not disclosing your tax liens to the people working with you to sell your house, whether that be an attorney or real estate agent.
Even if you try to prevent disclosure of your lien, tax liens are discoverable through a title search. Tax liens can complicate the process of selling a home, so make sure that you are transparent to your real estate agent and/or attorney about your situation.
They can help zero in on lien-specific issues and provide expertise that smooth out the entire process. You could also acquire the help of a real estate agent or attorney that specializes in tax liens.
Handle Your Tax Lien Today
Though detaching from your home may be a difficult choice, you don’t want debt to continue attaching itself to you. Selling a house for cash can mean the difference between financial freedom and distress. If you avoid dealing with your lien, you could end up in even more trouble in just a few years to come.
Visit our homepage today and submit your home address. At iBuyer, we understand how complicated selling your home can be. We even offer a way to sell your home online, which results in a much speedier sale than traditional means. We’ll walk you further down this process with expert real-estate service that specifically serves cases like yours.