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How to Rent Out a Property with an Existing IRS Tax Lien
How to Rent Out a Property with an Existing IRS Tax Lien
Having the IRS place a tax lien on your property can complicate renting it out. A federal tax lien gives the IRS a legal claim to your assets, including real estate, to satisfy unpaid taxes. While challenging, it is possible to rent out a property with a tax lien if handled carefully. Here is a guide to navigating the process.
Understanding IRS Tax Liens
When you fail to pay certain taxes, the IRS can file a public Notice of Federal Tax Lien to alert creditors that the government has a right to your property[1]. Key facts on tax liens:
- Attaches to all current and future property owned
- Does not transfer ownership to the IRS
- Can be filed without notifying the taxpayer first
- Appears on credit reports, impacting finances
The IRS uses liens to lay claim to assets and prevent transfer or sale without their permission. A lien can be removed by paying the tax debt in full.
Setting Up an Escrow Account
To avoid issues, have the tenant pay rent into a designated escrow account rather than directly to you. The funds are earmarked for the IRS, preventing you from spending the income elsewhere[3]. Consult a tax professional on properly structuring the escrow account.
Obtaining IRS Approval
Consider asking the IRS to subordinate their lien to facilitate renting the property. This voluntarily makes their lien lower priority than other interests in the property. The IRS may agree if you have a plan for using the rental income to pay off your tax debt.
Reporting Rental Income
You must report all rental income on your annual tax return and pay any resulting tax[4]. The IRS will expect their share of rents collected on a liened property. Failure to report income could prompt further enforcement.
Paying Toward the Tax Debt
To maintain good standing, pay a portion of each month’s rent toward your back taxes. Stick to any payment plan worked out with the IRS. Showing good faith can help avoid stricter collection actions.
Consequences of Default
If you ultimately default, the IRS can seize the property, evicting tenants in the process[5]. They may also garnish rents or levy the escrow account. Stay current on payments to avoid disruptions.
Claiming Expenses
You can claim rental expenses like property taxes, repairs, advertising and certain utilities as itemized deductions on Schedule A, reducing your taxable income[6]. Keep detailed records.
Seeking Professional Help
Consulting a tax attorney or CPA can help you navigate renting with an IRS lien. An expert can negotiate agreements, set up the escrow account properly, and ensure accurate reporting.
Communication is Key
Maintain open communication with both the IRS and your tenant. Transparency about the lien can help avoid problems down the road. Respond promptly if issues arise.
Renting with a tax lien requires care and planning. But it can be done if you understand the risks, act responsibly with income, and keep making payments toward your tax debt.