I Have a Tax Lien on My House — Can I Still Sell It?

You May Not Have to Pay the Tax Lien Before Listing Your House

This is one of the biggest misconceptions homeowners have.

Someone may tell me:

“I want to sell, but I can't afford to pay the tax lien first.”

My response is:

Let's look at the numbers before we assume that's a problem.

If there's sufficient equity, you may not need to write a large check before selling.

Instead, the process can potentially work like this:

Your house is sold.

The appropriate payoff or demand is obtained.

The applicable lien is paid from available proceeds through escrow.

The transaction closes and you receive the remaining proceeds.

For California FTB liens specifically, the state says escrow, title or mortgage companies can submit a payoff request through its eDemand process. The FTB then provides the payoff information necessary to address the lien in the transaction.

That's considerably less frightening than:

“I owe taxes, therefore I can't sell my house.”

What Happens When I Tell You I Have a Tax Lien?

First:

Thank you for telling me.

😂

Please don't hide it because you're embarrassed or hope it somehow won't show up.

I deal with complicated real estate transactions. A lien is something we need information about—not something I'm going to judge you for.

If you have paperwork regarding the lien, that's helpful.

If you don't, that's okay too.

As part of the real estate transaction, title information can help identify recorded liens and other matters affecting the property.

I can provide the information we have to my escrow and title professionals so the appropriate payoff information can be requested.

Then we start getting actual numbers.

How Much Do I Have to Pay?

We need a current payoff or demand.

Don't automatically rely on the amount shown on a five-year-old document.

Depending upon the obligation, interest, penalties, fees, payments and other adjustments may affect the amount required to satisfy the lien.

For example, California's FTB payoff process provides a current Demand for Payment of State Tax Lien after processing the payoff request.

That's the number we're interested in for the transaction.

Not:

“I think I owe about $30,000.”

We want to know what actually needs to be handled.

What If I Have Plenty of Equity?

Then the lien may simply become another obligation accounted for in the transaction.

Let's use a simplified example.

Suppose your house sells for:

$700,000

You owe:

$400,000 mortgage

and have:

$30,000 tax lien

There are also normal selling and closing expenses.

Assuming there are sufficient proceeds and no other complications, there may be plenty of equity available to satisfy the mortgage, applicable tax lien and transaction expenses through closing.

You receive what's left.

The tax lien matters.

But it doesn't necessarily prevent the sale.

What If I Have a Federal IRS Tax Lien?

A federal tax lien can affect your ability to transfer clear title, but that doesn't necessarily mean the property can't be sold.

According to the IRS, when sufficient equity exists, the federal tax lien is normally paid from the proceeds at closing.

If the sale won't generate enough money to fully satisfy the federal tax lien, the situation becomes more complicated. The IRS says a taxpayer may be able to request a discharge of the property from the federal tax lien so a sale can proceed under qualifying circumstances.

That's where I don't want homeowners trying to solve the tax problem themselves based on something they read online.

We identify the shortage early and involve the appropriate escrow, title, tax and/or legal professionals.

What If It's a California State Tax Lien?

California's Franchise Tax Board also has procedures for tax liens during real estate transactions.

The FTB specifically instructs people who are in escrow to have their escrow, title or mortgage company complete the payoff request. Once the appropriate payoff is processed and payment received, the FTB can release the lien.

Again, that means:

The existence of the lien doesn't automatically mean you have to solve everything before selling.

We need to determine what is owed and whether the transaction has sufficient proceeds to address it.

What If I Have More Than One Lien?

That's when we need to look at the entire picture.

Maybe there's:

A mortgage.

An IRS lien.

A California tax lien.

A judgment.

Delinquent property taxes.

A home equity line.

An HOA lien.

Or another recorded obligation.

We don't evaluate one of those in isolation.

We want to know:

What is the house realistically worth?

What are all the obligations affecting the property?

What are the estimated selling expenses?

Is there enough money for everything that needs to happen?

That's how we determine whether you have a relatively straightforward sale or a more complicated one.

What If I Don't Have Enough Equity to Pay the Tax Lien?

Now we have a different conversation.

But it still doesn't automatically mean:

“You can't sell.”

It means we need more information.

For a federal tax lien, there are circumstances where a property can potentially be discharged from the lien even when sale proceeds won't fully satisfy the tax debt, but IRS approval and specific procedures may be required.

California's FTB likewise has separate procedures for situations involving insufficient funds in escrow, rather than simply saying the property can never be sold.

Depending upon the entire financial picture, we may need to investigate:

Whether a lien can be addressed for less than the full amount through an applicable process.

Whether additional seller funds are available.

Whether another lienholder needs to cooperate.

Whether the mortgage itself requires a short sale.

Or whether another solution is more appropriate.

This is where experience with complicated transactions matters.

Is a Tax-Lien Sale the Same as a Short Sale?

Not necessarily.

A short sale generally involves selling a property when the proceeds aren't sufficient to satisfy the mortgage debt and other required costs without lender approval of a shortage.

You can have a tax lien and still have plenty of equity.

For example:

House value: $800,000

Mortgage: $300,000

Tax lien: $50,000

That isn't automatically a short sale.

There may be plenty of equity to satisfy both obligations.

But imagine:

House value: $500,000

Mortgage: $475,000

Tax lien: $60,000

Now we have a much more complicated situation because the expected proceeds may not be sufficient to satisfy everything.

That's why we need to look at all the numbers, not simply the existence of the tax lien.

What If I Didn't Know There Was a Tax Lien?

You're not the first person.

Sometimes homeowners discover liens when they're preparing to sell.

Sometimes something appears in title information that they thought had been resolved years ago.

Sometimes an inherited-property owner discovers obligations they knew nothing about.

Don't panic.

First determine exactly what the recorded item is.

Then determine:

Is it still valid?

Has it already been paid?

Is documentation missing?

What is the current payoff?

What needs to happen to address it for the sale?

The discovery of a lien is a problem to investigate.

It isn't automatically the end of the transaction.

Should I Wait to List Until the Tax Lien Is Resolved?

Not automatically.

Depending upon the situation, there may be things we can work on simultaneously.

But I do want to know about the lien as early as possible.

Time helps.

If a payoff needs to be obtained, we have time.

If there's an error, we have time to investigate.

If there isn't enough equity, we have time to explore the available options.

If specialized tax or legal help is required, we discover that before we're three days from closing.

Known problems are much easier to deal with than closing-week surprises.

Don't Be Embarrassed to Tell Me About a Tax Lien

People sometimes treat liens as though they're a character judgment.

They're not.

From my perspective, they're a transaction issue.

I've dealt with short sales, probate properties, inherited houses, partial claims, distressed properties and other complicated situations throughout my career.

If you call and say:

“Dawn, I have a tax lien and need to sell my house.”

My response isn't going to be:

“How did you let THAT happen?”

😂

It's going to be:

“Okay. Let's find out what we're dealing with.”

That's the useful conversation.

I Have a Tax Lien and Need to Sell. Where Do I Start?

Start with three things:

What is the property realistically worth?

What do you owe on the mortgage and other property-related obligations?

What tax lien or liens are we dealing with?

If you don't know all three answers yet, that's fine.

That's where we begin gathering information.

From there, escrow and title can help identify transaction-specific payoff requirements, and tax or legal professionals can become involved if the situation requires expertise outside the real estate transaction.

You don't have to become an expert in tax liens before selling your house.

Yes, You May Still Be Able to Sell Your California House With a Tax Lien

Don't let the word “lien” convince you that you're trapped.

If there is sufficient equity, the situation may be much more straightforward than you expect.

And if there isn't sufficient equity, finding that out early gives us the opportunity to investigate what alternatives may be available.

I've been a California real estate broker for more than 26 years and work with complicated property sales throughout Southern California.

You don't have to resolve every problem before you call me.

Tell me what's going on.

We'll look at the property, the likely value and the obligations against it.

Then we'll determine the next step.

Call Dawn Anderson, Broker — Midas Realty Group

Tax liens and their treatment in a real estate transaction depend upon the taxing authority, lien, available proceeds, ownership and individual circumstances. Tax and legal questions should be addressed with the applicable taxing authority and appropriately qualified tax or legal professionals. This post provides general real estate information and is not legal, tax or financial advice.

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