How to Sell a Property with an IRS Tax Lien

How to Sell a Property with an IRS Tax Lien

Having a federal tax lien placed on your property can seem like a daunting hurdle if you need to sell. However, it is possible to sell real estate that has an IRS lien attached. Here are some tips for navigating the process successfully.

Understanding IRS Tax Liens

The IRS can place a tax lien on property when back taxes are owed. This gives them a legal claim to the property as collateral for the unpaid tax debt. The lien protects the IRS’s interest in being paid what they are owed if the property sells.

A federal tax lien arises automatically when:

• The IRS assesses a tax liability
• The taxpayer does not pay the amount due after notice and demand
• The lien is publicly recorded in the county records

This “secret” lien can spring up any time unpaid taxes are owed[1].

Removing the Lien Before Sale

If possible, it’s best to pay off the tax debt and get the lien removed prior to putting the property on the market. This removes any encumbrance on the real estate and makes the sale process simpler.

You can request a lien discharge or subordination from the IRS to facilitate the sale. The IRS will usually work with taxpayers in these scenarios, as a property sale can allow their tax debt to be paid[2].

Selling with the Lien in Place

If you cannot pay off the tax debt before selling, it is still possible to sell the property with the IRS lien attached. This involves extra steps:

• Disclose the lien upfront to potential buyers.
• The sale contract should state the lien will be paid off from the sale proceeds.
• Set aside funds at closing to pay the IRS lien amount.
• IRS will release lien once paid in full from sale proceeds.

The IRS wants to be paid what they are owed and will work with the settlement company to release the lien when paid[2].

Selling for Less Than the Lien Amount

If you need to sell the property for less than what is owed for the tax lien, it is a bit more complicated but still possible. You will need to apply to the IRS for a lien discharge:

• File Form 14135 to request discharge for the sale.
• Explain why the sale is in the IRS’s best interest.
• The IRS will evaluate if discharging the lien to permit sale is appropriate.
• If approved, the lien is removed to allow sale below the lien amount.

The IRS wants to facilitate payment arrangements, so they will often discharge a lower-value lien to get some payment from the sale[2].

Selling Property in Probate

If selling real estate owned by a deceased person, there are special procedures for discharging an IRS lien:

• File Form 4422 to request discharge from estate.
• The estate can make installment payments to satisfy the lien.
• IRS can partially discharge lien if the sale won’t fully satisfy tax debt.

This process allows the executor to sell the property as part of probate proceedings[3].

The Tax Sale Option

If the property has a high redemption rate, meaning the owner is likely to repay, the tax lien certificate can potentially be sold to an investor at auction. This pays off the IRS lien and transfers the certificate to the investor[4].

The investor can then collect interest and penalties when the owner pays. However, tax lien investing carries risks and requires thorough research beforehand[5].

Consult a Tax Professional

Navigating an IRS lien on a property sale can get complicated. Working with a tax attorney or CPA experienced in IRS negotiations can help ensure the process goes smoothly. An expert guides you in resolving the tax debt through the optimal resolution strategy.

With proper planning and diligence, selling a property with a federal tax lien is feasible. Understanding the lien discharge process and working constructively with the IRS makes it possible to remove this obstacle to a successful sale.