Real Estate and Back Taxes

Most people are aware that failure to pay federal, state, or local taxes has serious repercussions. One of those consequences involves the Internal Revenue Service (IRS) placing a tax lien against your house. This can be potentially problematic, particularly if you are planning to sell your home. Before delving into how to proceed if you owe back taxes and wish to sell your home, it is important to understand the link between real estate and back taxes, which can lead to a tax lien.

What is a Tax Lien?

A tax lien occurs when the local, state, or federal government takes possession of an individual’s property in order to secure the payment of taxes owed by said individual. A tax lien is generally imposed when an individual owes $5,000 or more in taxes and also affects one’s credit score.

The tax authority must follow procedure in order for the tax lien to be filed, which includes:

  • The liability has to be assessed
  • A notice and demand for payment must be served
  • The individual must fail to pay taxes owed within 10 days of receiving the notice

How Serious Is It?

That generally depends on how much is owed. However, it is sometimes better to have an IRS tax lien than a municipal or state one. This does not mean that a federal lien is not serious, but the IRS is generally more willing to work with those who have back taxes. Since states and municipalities are smaller government entities, owing them taxes tends to be a bigger problem.

State tax liens vary from state to state, but are typically more serious. As a general rule of thumb, paying off state or municipal back taxes should be the number one priority over federal back taxes.

When the IRS files a federal tax lien, it generally allows you more time to work on a plan. After this, the odds of keeping the house and ultimately selling it are typically in your favor. However, having a tax lien is extremely inconvenient. It affects your credit score and could jeopardize your options for financing a new home.

Real Estate and Back Taxes: How to Remove a Lien on Your Property

Even if the IRS has a tax lien on the property, it does not necessarily mean that the government has taken over the property or that you will be forced to sell. It should be noted that the house can only be sold if there is sufficient equity to cover the debt. Even then, selling a property with a lien can be difficult.

If you owe back taxes, you can do the following:

– Pay the Debt in Full

This is the simplest way to get the IRS to withdraw the lien.

– Request an Installment Plan

Some people are unable to pay off the debt all at once. In this case, explaining your situation to the IRS or county treasurer is a start. An installment plan may be arranged (if the tax debt is less than $50,000) in order to get the lien removed, taking your financial situation into account. At least three payments have to be made before filing a request for the withdrawal of the lien, and it could take up to three months to have it removed. However, once the lien is removed, you will be in the clear, even though you will still be making monthly payments. The debt has to be repaid within six years.

– Request to Sell the Property

This only applies if there is sufficient equity to cover the debt. The proceeds from the sale of the home can be used to pay off your debt and ultimately have the lien removed. It is important to keep documentation of every step of the sale, as this will be required by the IRS.


How to Avoid Getting a Tax Lien in the First Place

When it comes to real estate and back taxes, if you intend to sell your house, a tax lien would be a serious inconvenience – you may even lose your house and not get the chance to sell it. Here are some ways to avoid this financial situation.

– Pay Up

If you are fully aware that you owe back taxes, paying them before putting the house up for sale will help you avoid a tax lien.

– File an Extension

If your back taxes are more than $10,000 and you are unable to pay the full amount owed immediately, you can file a request to extend the deadline for up to 120 days.

– Offer in Compromise

Filing an Offer in Compromise is one potential option if you are only able to pay back a portion of the back taxes owed.

  • What is it? An Offer in Compromise (OIC) allows you to settle your debt with the IRS for less than the total amount owed. Many people who are granted an OIC end up paying less than 20% of the amount they owe the IRS.
  • How Does it Work? The individual and the IRS acknowledge that there is no possibility of paying off their back taxes. In other words, the individual does not have finances or property that amount to the total owed.

The individual then offers the IRS the maximum amount they can afford. If the IRS is in agreement that the amount suggested is indeed the most it can expect to get from the individual, the IRS may agree to accept the offer. Upon completion of payment of the agreed amount, the tax debt is deemed paid in full.

Selling Your Arizona Home and Back Taxes

Returning to the question, Can you sell your home if you owe back taxes?

Yes, but only under certain circumstances.

It is generally a good idea to pay off any back taxes owed before closing on a deal to sell your house. Selling a home when taxes are owed can be extremely difficult. Even if you do manage to sell the home, a tax lien will affect your credit score and ultimately your financing options for purchasing a new home. Fortunately, taxpayers have significantly more options today for settling their tax problems and limiting damage to their credit.

If you owe back taxes, but need to sell your home, we can help. Buy My House Now purchases homes under a variety of different conditions and we’d love to speak with you regarding yours. Contact our representatives today!