Selling Your Home with Back Taxes:

A Guide for Homeowners

Despite facing financial challenges, homeowners have the right to sell their properties, even with outstanding back taxes.

Understanding the options available can help homeowners navigate this situation effectively.

Understanding Liens: A Clear Title to Smooth Property Transactions

In the realm of real estate, a clear title signifies the absence of any encumbrances or liens on a property. A lien, in essence, is a legal claim attached to a property, securing payment of a debt owed to a creditor. Creditors resort to liens as a safeguard to ensure they receive the money owed to them, using the property as collateral.

Various entities can hold liens against a property, ranging from delinquent property taxes to second mortgages. These liens act as legal claims, preventing the property owner from selling or fully utilizing the property until the debt is settled.

Tax Liens: A Common Type of Encumbrance

Tax liens, specifically, arise from unpaid taxes owed to government entities, such as local municipalities or the Internal Revenue Service. These liens attach to the property's value, ensuring that the outstanding taxes are paid before the property can be sold or transferred.

Clearing Liens: A Prerequisite for Property Transactions

To ensure a smooth and successful property sale, removing liens is essential. This involves either paying off the outstanding debt or negotiating a settlement with the creditor. Once the creditor acknowledges the lien as satisfied, it is officially removed from the title.

Immovable Liens: Ensuring Debt Repayment

Liens act as immovable obstacles to property sales. Potential buyers conduct title searches to uncover any liens that may hinder the transaction. Until the liens are resolved, the property cannot be legally transferred or sold.

Navigating Liens: Seeking Professional Guidance

Homeowners facing liens should seek professional guidance from tax advisors or legal counsel to understand their options and develop a strategy for resolving the liens. With proper planning and execution, liens can be effectively managed, paving the way for a clear title and a successful property transaction.

Tax Liens: A Far-Reaching Reach

An IRS tax lien extends beyond just your home. When you owe back taxes, the IRS automatically imposes a lien on all property you possess, encompassing real estate and other assets. The IRS is relentless in its pursuit of unpaid taxes, leaving no stone unturned.

While local governments and state taxes may also result in liens against your property, their enforcement tends to be less aggressive. Nonetheless, title companies will uncover any liens during their property title searches.

The IRS asserts its claim by filing a Notice of Federal Tax Lien with the relevant register of deeds in the state where the property is located. This public declaration serves as a warning to potential buyers that the property is encumbered by a tax lien, effectively halting any sale attempts.

The far-reaching nature of tax liens necessitates prompt action to address the situation. Failure to do so can lead to severe financial consequences, including the IRS seizing the property to satisfy the debt. Seeking guidance from a tax advisor or legal counsel is crucial to navigate the intricacies of tax liens and develop an effective debt resolution strategy.

Resolving Delinquent Property Taxes with Sale Proceeds:

A Straightforward Approach

Settling outstanding property taxes through the proceeds of your home sale offers a straightforward solution to this financial burden. By securing a fair cash offer that adequately covers the tax debt, you can effectively eliminate this encumbrance.

Once you receive the sale proceeds, the relevant taxing authority, typically the state's department of revenue, will clear the title of the tax debt. This process ensures that the lien is removed and the property is free from any tax-related claims.

In the case of an IRS tax lien, you'll need sufficient equity in your property to cover the back taxes and mortgage balance. Additionally, factor in closing costs, attorney fees, and other associated expenses to ensure the sale price can accommodate all financial obligations.

Selling your home to resolve delinquent property taxes can be a viable option, provided you find a suitable buyer willing to offer a fair price. This approach offers a convenient and efficient way to eliminate the tax debt and regain control of your financial situation.

Navigating the Numbers: An Example of Paying Off Back Taxes

Let's delve into a practical scenario to illustrate the process of paying off back taxes through a home sale.
Imagine you have a remaining mortgage balance of $50,000 and an outstanding federal tax lien for unpaid income taxes amounting to $10,000. Additionally, let's add in another $5,000 in delinquent property taxes, resulting in a property tax lien.

In this situation, selling your home would require generating enough proceeds to cover both the mortgage and the combined tax debts of $15,000. This means you would need to find a buyer willing to pay a price that exceeds $65,000 to account for all financial obligations.

However, there's an additional consideration: closing costs. These expenses, which typically include attorney fees, title company fees, and other miscellaneous charges, can range from 2% to 5% of the sale price. Assuming an average closing cost of 3%, you would need to sell your home for at least $68,450 to cover all costs effectively.
Fortunately, home sales often generate sufficient proceeds to accommodate these expenses. For instance, if you manage to secure a cash offer of $75,000, you would not only settle your debts but also walk away with a surplus of $6,550.

This example highlights the importance of carefully evaluating your financial obligations and considering all associated costs when selling your home to resolve back taxes. With proper planning and a realistic assessment of your property's value, you can navigate this process successfully and potentially achieve a profitable outcome.