One of the lamentable truths of the Covid xix pandemic is that while the housing market is hot, many people are in fiscal distress. Taxpayers with unpaid taxes receive scary messages that tell them the IRS intends to lien or levy their holding. It'south of import to understand the distinction between a tax lien and a levy. When the IRS levies your holding, they take it. Except in the about dire of circumstances (called a "jeopardy levy") the IRS will not levy a taxpayer's principal residence. The IRS actually doesn't want to seize real manor because and then they take to sell information technology to pay the taxes. It'south much easier for them when taxpayers pay their taxes in cash from the proceeds of a sale. But an IRS lien ways that selling your property just got a lot harder.

While many people believe that they tin can't sell their dwelling house if information technology has an IRS lien on information technology, information technology turns out that is a myth. E. Martin Davidoff, Partner in Charge of Prager Metis' National Tax Controversy Practise, often helps individuals sell their homes and other property that are subject to an IRS lien. You can even sell if you are "upside downward" in your mortgage (where the corporeality you owe is more than the home is worth). What you absolutely cannot exercise, however, is sell your dwelling house at a turn a profit and expect to not take to pay your back taxes.

The near straightforward style to have an IRS lien removed from a holding is to accept it released. The IRS will release a lien when the taxpayer satisfies their outstanding taxation debts. Of course, sometimes it is not possible to pay back taxes without first selling the property. Taxpayers mistakenly believe that considering the IRS volition get paid first in the event of a sale, that they cannot list and sell their property. That is not the case, but what is the case is that virtually mortgage lenders are reluctant to grant a mortgage to a potential buyer for a property that is subject to an IRS lien. When a taxpayer tin can sell their property at a gain and cover both the mortgage and pay the back taxes Davidoff recommends working with a tax controversy specialist to obtain a lien subordination. When an IRS lien is subordinated the depository financial institution is allowed to pace in front of the IRS while the lien remains in identify. That means the mortage gets paid first, but the IRS gets paid next. For highly appreciated properties and taxpayers who are highly motivated to settle their IRS debts, a lien subordination is a win-win. Taxpayers tin can use for lien subordination using IRS Form 14134, Awarding for Subordination of Federal Tax Lien.

But what almost when the holding is "upside down?" If y'all owe more than on your mortgage than what the dwelling is worth, you might not be able to sell your property for a high enough figure to pay off both the remaining mortgage and your unpaid taxes. It is unlikely in this case that the IRS would permit a lien subordination. Even so, Davidoff counsels that it is possible to request that the IRS discharge the lien. When the IRS discharges a lien, it does then simply against a specific property. The IRS will even so maintain liens against other property the taxpayer owns. A lien discharge is requested on IRS Form 14135, Application for Document of Discharge from Federal Tax Lien.

The major obstacle to obtaining a lien discharge on an upside down home is convincing the IRS that the auction toll is the fair market place value (FMV) of the property. In other words, don't look get a lien belch for a discounted auction to a friend or family unit member. Wait to provide a qualified appraisal for an "arm's length transaction" (i.e., a sale to a disinterested third political party). The IRS may however belch a lien for a non-arm'due south length auction, but it may require two appraisals or i appraisal and a letter from a disinterested real estate amanuensis willing to provide the expected amounts of a comparable sale in the area. Alternatively, the taxpayer can request the IRS consider an "equalization value." Equalization is where property's assessed value for belongings tax purposes is multiplied past an applicable gene to determine the property's fair market value. For example, belongings is ofttimes valued at one-3rd of its off-white market value for the purposes of assessing belongings taxes. Equalization would accept the property tax value and multiply it past 3 to determine the property's FMV for a sale. Taxpayers requesting lien discharge for auction to a related party should also exist aware that the IRS uses third-party sites such as Zillow and Trulia to help establish FMV.

In all things taxes and real manor timing is key. Davidoff reminds taxpayers that the presence of an IRS lien makes it harder to close on the property, not harder to sell. Indeed it is possible for taxpayer to listing and sell a property under an IRS lien just to exist unable to close the transaction because of that lien. Even when everything goes right with respect to lien subordination or belch, the process can take more xxx days. In a hot real manor market the time it takes the IRS to process the paperwork may definitely exceed a buyer's patience. Davidoff urges taxpayers to be prepared and to showtime the lien subordination or discharge process when they first decide that they want to sell the property.

Davidoff has the following tips to ensure a smooth closing process:

  • Submit the application for subordination or belch every bit soon as possible. It is not even necessary to await for the appraisal. Note on the application that the appraisal has been scheduled and submit the application using the equalization amount calculated using canton holding taxation records. The appraisal tin follow.
  • Allow upward to 60 days for closing in any escrow paperwork. It is not necessary to disclose to a potential buyer that there is an existing lien on the property. Applying early and requesting a full 60 days for closing will typically ensure plenty time for a smooth shut.
  • Go a payoff letter from the mortgage lender that spells out the verbal payoff amount. That makes it easier for the IRS to practice their chore of evaluating the awarding. They know at the time of the application exactly how much the mortgage payoff will be and what (if anything) they can look to realize by subordinating or discharging the lien.
  • Rent a helper. The applications for lien subordination or discharge can get pretty technical and IRS processes and procedures tin can exist hard to navigate. When possible it is ofttimes beneficial to rent someone experienced with completing the forms and navigating the process. Sometimes these professionals will negotiate a discounted fee and/or can have their fees included as part of the auction closing costs.

Finally, as with near financial matters, it is important to not let the tax tail wag the situational dog. Sometimes the tax debt is close to the statute of limitations the IRS has for collecting it. Information technology may exist better to forego a bit of profit on a fast sale in a hot market to have a big corporeality of tax debt simply "fall off" the IRS books. Alternatively, filing bankruptcy may present a better option in a given situation than selling a property to pay a tax debt. Selling an upside down property could result in taxable cancellation of debt income from the mortgage lender, depending on the taxpayer's circumstances prior to the sale. Taxpayers should completely evaluate the context surrounding their revenue enhancement debt and their general fiscal state of affairs before requesting lien subordination or belch prior to a belongings sale. Davidoff reminds taxpayers that ensuring a thorough evaluation of all available options is one more than reason to rent an experienced revenue enhancement controversy professional to provide a complete plan of resolution for their tax (and other) debts. Using the proper choice can sometimes even save the taxpayer enough money to cover the costs of hiring the professional person.