Perhaps you’ve inherited property that has back taxes attached to it as a lien, or maybe you’ve struggled with your finances in recent years and accrued unpaid property taxes.
In any case, can you sell a house with back taxes owed?
“I had a listing where there was about $75,000 in back taxes on the property,” says Greg Clark, a top real estate agent in Waco, Texas. “That’s problematic if there’s not enough equity, but there happened to be enough equity in the house that we could pay it out of proceeds.”
While unpaid taxes will add an additional layer of complexity to the sale, real estate agents and attorneys encounter this situation more often than you might realize — and have the solutions to help. If you’re concerned back taxes could be a blocker to your sale, you do have options to pursue.
We’ve put together this thorough guide to selling a house with back taxes, which will cover:
- What are back taxes?
- Income taxes
- Property and municipal taxes
- How can I tell if I owe back taxes?
- Look up taxes owed by name or address
- Run a title search
- Options to settle your debt
- Use your sale proceeds to cover the unpaid taxes
- Work with an investor or house-buying company to resolve the debt
- Negotiate with the buyer to work out a deal
- Pursue an offer in compromise
- Pay off the taxes, but expect a waiting period
What are back taxes?
- Taxes on what you earn, such as individual or personal income tax based on salaries, wages, and investments
- Taxes on what you own, such as property taxes, which are also called real estate tax or “real” property tax
- Taxes on what you buy, such as sales tax, which provides revenue to states and municipalities based on items you purchase at a set rate
Any one of these types of taxes becomes a “back tax” when it goes unpaid and becomes past-due. According to Jeffrey L. Nogee — a New York City-based partner at the nationwide firm Tully Rinckey PLLC — unpaid income taxes and unpaid municipal property taxes can attach to your property.
Income taxes: Federal, state, and municipal
If you neglect or fail to pay your federal income tax debt, the Internal Revenue Service (IRS) can make a legal claim against your property called a Federal Tax Lien that alerts creditors the IRS has a legal right to your property. The IRS filed 291,081 federal tax liens against individuals and businesses in 2020, about 46% fewer than in 2019, agency data shows.
In addition to federal income tax, 42 states levy income taxes. Those that have no state income tax are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Your state can place a lien on your property for unpaid state income tax, as can some municipalities that also levy income tax. New York City and Yonkers, for instance, have their own income tax on top of the state’s income tax.
Property and municipal taxes
Property taxes are an essential revenue source for state and local governments, which use these funds for public services such as police and fire departments, schools, and roads. The Tax Foundation says that property taxes nationwide account for over 70% of total local tax collections.
Within this category, however, you also might have a county tax as well as a separate city or village real estate tax, as well as tax relief that might or might not apply to the current property owner.
For instance, New York State’s School Tax Relief (STAR) program offers property tax relief to eligible homeowners: a basic version for most anyone and an enhanced version for seniors, Nogee says. “The problem comes when someone who had the enhanced STAR dies. The enhanced exemption dies with that person, so technically, the school tax portion of the real estate tax is increased back to the non-exempt level.”
How can I tell if I owe back taxes?
If you haven’t received a bill or legal notice through the mail, you can search online for how to view any tax balance and payment activity or do a title search.
Look up taxes owed by name or address
The IRS allows taxpayers to search securely for any amount owed. For state taxes, search for the department of taxation and finance or the state comptroller. As for property taxes, search for your county, city, or village tax entity online. For example, residents in Waco, which Clark serves, can search for their property balance by name or street address via the McLennan County Tax Office and pay by check or credit card.
Run a title search
One of the most sure ways to discover any liens or back taxes owed is to talk with a real estate agent about coordinating a title search for you. “When I list a home, I always open the title work first, which gives the title company a bit of a head start,” Clark says. “What I don’t want to do is delay closing because of any of these issues.”
Statistics from the National Association of Realtors show that titling and deed issues delayed 10% of contracts in June 2021 and terminated 3% of them. Giving the title company ample time to find any money owed also allows you time to discuss how to handle any back taxes owed and other debts before your home goes under contract.
Unfortunately, some records also aren’t reported accurately or in a timely manner. If you have proof that you’ve paid your tax debt, talk with a tax adviser about disputing a bill that still shows as unresolved, Nogee says.
Options to settle the debt
You can sell a house with back taxes owed as long as you have a plan to resolve the debt. However, you’ll want to choose a solution that allows for adequate timing and is appropriate for your tax liability. Let’s look at a few pluses and drawbacks of these:
1. Use your sale proceeds to cover the unpaid taxes
When you sell a home, some of your proceeds will go toward paying various fees. These include real estate transfer taxes, title fees, and agent commissions. According to the IRS, if you have enough equity in your property, the lien is paid out of the proceeds at the time of closing, similar to all your other fees owed at the end. Agents and attorneys such as those we’ve consulted express that this is the most common and streamlined solution to selling a house with back taxes.
Here are a few benefits to going this route:
- You don’t have to drain existing savings
“As long as the equity is greater than what’s owed, the easiest path would be to use the proceeds because nobody’s writing a check out of pocket,” Clark says, noting that this is especially helpful in estate situations with more than one heir.
- It’s money you never ‘see’
At the time Clark spoke to HomeLight, he represented a seller who planned to use the proceeds to cover about $4,300 in state taxes owed on a three-bedroom, two-bath home of about 2,000 square feet. “Most people are more comfortable paying [the debt] out of proceeds because they never see that money,” he says.
- Cover fees in one fell swoop
Nogee says that sales proceeds also resolved a foreclosed mortgage and about $100,000 of monthly maintenance charges on a two-bedroom co-op after the original owner died. The property sold for about $500,000. “Selling the property and paying off the mortgage, taxes and other debts that could be a lien on the property is the best way to go,” Nogee says.
What if the proceeds fall short?
If the home sells for less than the lien amount, you can request that the IRS discharge the lien, which removes the lien from the property to complete the sale to a new owner. (You’d still owe whatever tax debt remains, and the IRS recommends filing this application at least 45 days before you need notice of this certificate.)
Get the right help
When you’re selling a house with an extra hurdle such as a tax lien, it’s important to partner with a real estate agent who knows what they’re doing. If you’re looking for a reputable agent with the right experience in selling homes with tax liens, HomeLight would be happy to introduce you to a few highly skilled agents in your area. It’s also recommended to hire a tax specialist or tax attorney to handle remitting payment and to ensure that the title company receives the appropriate paperwork.
2. Work with an investor or house-buying company to resolve the debt
Real estate investors are less likely to shy away from homes with title issues such as a tax lien. Whether you work with a large house-buying company or local home flipper, investors have the capital to pay all-cash and usually offer to buy your home “as is”, resolving your debt in the process.
Your buyer would still need to account for the cost of paying the lien in what they’re willing to offer you for the property, which could result in a discounted price. However, a lower price may be worth it in exchange for a quick and easy closing.
If this option interests you, we’d recommend checking out HomeLight’s Simple Sale platform. Through Simple Sale, HomeLight provides you with a full cash offer for your home. You can skip the repairs and prepwork, and go straight to receiving an offer. You also won’t pay the typical agent commission fees of 5%-6%.
3. Negotiate with the buyer to cover the taxes
Buyers love hardwood floors and great curb appeal. But a tax lien that comes with the property? Not so much. That said, it’s not unheard of for sellers and buyers to find a way forward and clear the lien. Perhaps it’s a hot seller’s market or your property offers the buyer value in other ways that makes them inclined to compromise with you.
Clark says as long as the buyer’s mortgage covers the cost of the property, and the buyer and the buyer’s agent are agreeable, the parties can negotiate how to handle the closing costs so that the seller has enough to pay the outstanding taxes. “It would be done as a buyer credit back to the seller for discretionary spending,” he says.
4. Pursue an offer in compromise
The IRS also has an offer in compromise that allows taxpayers to settle their tax debt for less than a full amount if they can’t pay it in full, or if doing so would create a financial hardship. The IRS accepted only about one-third of the offers proposed in 2020. The agency says that “absent special circumstances,” it will not accept such offers if it thinks the liability can be paid in full through a payment agreement or a lump sum.
5. Pay off the taxes, but expect a waiting period
The IRS says that the easiest way to get rid of a federal tax lien is to pay it in full. Simple enough, right? Well, except for one detail: The IRS will release the lien within 30 days of receiving your payment. Even at the state or local level, this waiting period can create a problem at closing. “Sometimes people will send in $3,000 to pay the tax bill for the quarter two weeks before closing, and it won’t get recorded in time,” Nogee says.
The only way you can close that day is to give the title company $3,000 in escrow, which it will hold for a fee until it has proof that the taxes were paid; then it will return the escrow. “So you wind up paying twice, at least for a little while,” he says. For this reason, paying off the debt using the sale proceeds is typically the favorable option.
Sell now if it means paying off those taxes
Don’t hesitate to resolve unpaid taxes. Not only can this debt make it complicated to sell your home, but the IRS charges interest from the date those taxes are due until they’re paid in full. You’ll shell out the federal short-term rate plus 3%, with interest compounding daily.
Knowing that, using the equity in your home to pay those taxes off is often the obvious solution. When in doubt, reach out to a knowledgeable tax attorney and top real estate agent to guide you through this process. If the need to sell is urgent, reach out directly to Simple Sale for a full cash offer and a low-hassle sale. It may be overwhelming to get started when you’re dealing with back taxes on top of an already-complex process, but you do have options!
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