An IRS tax lien attaches to all of your property — real property included — the moment it arises. Under IRC § 6321, a federal tax lien attaches to all property and rights to property belonging to the taxpayer once a tax has been assessed and notice and demand for payment has been made. If you have unpaid federal taxes with a lien on record, that lien will show up in a title search and will complicate any real estate transaction.
The practical problem is this: a federal tax lien is a claim against the property that must be dealt with before a lender will fund a purchase loan, and before a title company will insure the transaction. If you are the buyer, lenders will generally not approve a mortgage when you have an outstanding federal tax lien. If you are the seller, you cannot deliver clear title while a lien is in place. Either way, the transaction stalls unless the lien issue is addressed directly.
There are three tools the IRS uses in real estate transactions. The first is a full lien release, which happens when the debt is paid or otherwise resolved. The second is a certificate of discharge, which removes the lien from a specific piece of property — done on IRS Form 14135 — and allows you to sell that property free and clear even if the underlying debt remains. The IRS will typically approve a discharge when the sale proceeds will be applied to the tax debt. The third is a certificate of subordination, which causes the lien to drop behind a specific mortgage — this can make a refinance or a purchase loan possible even with an active lien.
The discharge process under Form 14135 takes time — typically 45 days or more from submission, assuming the application is complete. If you are in a transaction with a hard closing date, start the process early.
One more thing worth knowing: a Notice of Federal Tax Lien is a public record. It affects your credit, your ability to get financing, and your ability to enter into certain contracts. Resolving the underlying tax debt — through payment, an offer in compromise, or a formal installment agreement with a request for a lien withdrawal under Rev. Proc. 2011-48 — is the cleanest long-term outcome.
If you are trying to buy a home, refinance, or sell a property and a federal tax lien is in the way, we can work through the options with you. Book a free 15-minute call or reach us at (619) 378-3138.
