Selling your house? How to remove an unpaid IRS tax lien
You are in the process of selling your house, and your bank alerts you that they found an IRS tax lien, and it needs to removed for your buyer.
It is not financially feasible for you to pay the IRS lien in full to have it immediately removed.
However, you can still successfully clear the title and sell your house.
The IRS has a lien removal process that allows us to clear the lien, the title, and close your sale even if you are only able to pay some, or none, of what you owe.
The lien removal process begins with IRS calculations based on the amount you will receive from selling your house.
The IRS formula includes the following:
- Sale price of your house.
- Amount you owe on your home mortgage.
- Closing costs (like real estate commissions).
From the sale price, the IRS deducts the amount you owe on your mortgage along with the closing costs. After the deductions, the amount you are left with is your home equity.
If your home equity is less than what you owe the IRS, you will be able to pay some but not all of your taxes. That is not a barrier to lien removal. The IRS can agree to remove the tax lien even if you have no home equity and cannot pay at all.
Here are two examples, one demonstrating the lien removal process if you have some leftover home equity, the other if you do not:
Example #1 – Equity
You owe the IRS $80,000 and have your house under contract at a sale price of $200,000. Your mortgage balance is currently $160,000, and closing costs will be $10,000. Your home equity is $30,000 ($200,000 sale price – $160,000 mortgage – $10,000 closing costs).
The IRS will accept $30,000 (home equity) of the $80,000 you owe them and remove their tax lien from house.
Example #2 – No Equity
You owe the IRS $80,000, your sale price is $200,000, but you owe $190,000 rather than $160,000 on your mortgage. Closing costs are still $10,000. In this case, your home equity is $0 ($200,000 sale price – $190,000 mortgage – $10,000 closing costs).
The IRS will remove their tax lien from your house without any payment to them as you have no home equity.
If your home equity is less than the amount you owe the IRS, they will accept the equity in exchange for removing the lien. As the examples demonstrate, the IRS can approve removal of your tax lien so you can sell your house even if there is not enough home equity to pay them. IRS just gets what you would have received from the sale.
The IRS does have a formal application process we need to follow for acceptance of your payment amount on the lien.
The process for lien removal requires the following:
- Proof that your house’s value is not worth more than your sale price. The IRS wants to make sure that you receive full market value for selling your house to ensure they get as much from their lien as possible. To show your sale price is correct, the IRS will require two appraisals of your house, consisting of
- An independent appraisal by a professional appraiser, and
- Your county tax assessor’s valuation of the property, or an informal valuation of property by disinterested third party.
- The two valuations should be equal to or less than your sale price. If they are greater than your sale price, the IRS can reject the lien removal and want you to get more for the house (and for them).
- Copy of your sales contract/purchase agreement.
- Copy of a title report on your house, listing all mortgages and liens (including the IRS’).
- Closing/settlement statement for the sale, showing your real estate commissions and closing fees that will be deducted.
- Copy of the deed/title to your house.
- Copy of your Federal tax liens.
- Filing of IRS Form 14135, Application for Discharge of Property from Federal Tax Lien. The IRS calls your lien removal a “discharge,” the legal terminology under Internal Revenue Code Section 6325. Section 6325 of the tax code grants the IRS the power to remove your tax lien in return for payment of any equity. The discharge application is designed to satisfy the requirements of Section 6325.
It is important for us to get the application for lien discharge and supporting records filed with the IRS as soon as your house is under contract. It can take the IRS 45-60 days to approve the application, so prompt action is best to manage delays in your closing.
A discharge application is not required if your home equity is more than your IRS debt, resulting in your receipt at closing of enough money to pay your tax debt in full. The IRS will require payment in full and will file a lien release showing you no longer owe the taxes.
An IRS lien removal on your home requires a formal application process and must comply with Internal Revenue Code 6325. Your application requires that the IRS receive your equity to remove the lien. If you have no equity to pay the IRS, that’s okay too. IRS can approve lien removal for as little as nothing. News of an IRS tax lien should not change your plans of selling your house.