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Can you sell a home subject to a federal tax lien?

It is possible to sell real estate when you have a federal tax lien even if the equity will not repay the lien in full. A federal tax lien is the government’s claim against your property when you owe back taxes.

To sell a home that has little or no equity you must obtain a certificate of discharge from the lien. Discharge of a property from the federal tax lien can occur under several Internal Revenue Code provisions. Any sale of real estate subject to a federal tax lien is complicated, but a tax attorney can help with the process.

The Internal Revenue Service may grant a discharge application under two main sections of the code. When the tax liability will be partially satisfied, section 6325(b)(2)(A) applies. When there is no value remaining in the property after payment of senior debts, the discharge section is 6325(b)(2)(B).

Here is an example where a lien is partially satisfied. Assume an individual owes $75,000 in back taxes. A home sells for $325,000, but there is a mortgage of $275,000 and $10,000 of closing costs. The IRS would apply the remaining $40,000 toward a partial satisfaction of the tax debt. An outstanding lien of $35,000 would remain in place against any other assets including personal property.

While home values have slowly increased, the other situation where there is no equity may also exist.

If the IRS determines there is no value remaining, it may also issue a discharge. We can use the same property that sells for $325,000, but the individual financed almost the full cost of the home or the value declined and the mortgage still has a balance $310,000 with settlement costs of $15,000. Here there is no remaining equity and the IRS lien interest is zero. However, as in the first example the lien would still be in place against other property.

Source: Nerdwallet, "Selling Your Real Property with an Attaching Federal Tax Lien," Michael Rude, September 5, 2014.

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