How IRS Liens Impact Selling or Refinancing Your Home

Real estate and home buying can be stressful but fulfilling. Ultimately, you may purchase the house of your dreams just to later decide you either need to sell it to move elsewhere or to refinance your home to create more financial flexibility. These decisions are not to be taken for granted as the costs associated with each can get into the hundreds of thousands of dollars.

When you have an IRS lien on your house, the process can look much different. You will still be permitted to sell or refinance your home, but the IRS is going to want to get their money before you’re able to do either.

If you attempt to sell your home with an outstanding IRS lien without a plan to remove the lien, the bank will find it and notify you of the necessity to satisfy this lien before the sale can move forward. However, the IRS likely won’t expect you to pay off the entire amount you owe them. Instead, they will often accept either an installment agreement or a smaller payoff amount.

Installment agreement

In the case of an installment agreement, the IRS has several options for you to remove the lien and proceed with the sale or refinancing of your home. These liens are often in the tens of thousands of dollars, so it’s rare that anyone would have the capital to immediately pay off the total amount.

Generally, these installment agreements will need to cover the balance over the course of 60 months or within the timeframe initially agreed upon with the IRS. As long as you can secure the payments by setting up a Direct Debit Installment Agreement through your bank, the IRS won’t consider outside circumstances such as income, assets, or other factors that could result in your paying off the lien in a more timely manner.

The IRS states you must make three on-time payments in the installment agreement before the lien will be removed from public record. Once this happens, the banks will no longer be alerted to the outstanding lien on your home.

At this point, you’ll need to provide documentation of the installment agreement, and documentation of on-time payments to mortgage companies in order to avoid these payments from being factored into your debt-to-income ratio. Failure to do so could result in a requirement to pay off the balance due under the entire installment agreement with the IRS prior to closing.

Payoff agreement

Another avenue to securing the right to sell or refinance your home can come through a separate payoff agreement with the IRS. The IRS may forgive a large portion of your balance if you use funds from the real estate transaction to satisfy the lien.

In this case, the IRS will consider the overall price of the home, the closing costs you are responsible for, and the balance on your mortgage. This is because the IRS won’t expect you to pay them when you never realized any gains on the value of your home.

For instance, if you sell your home for $500,000 and are responsible for $20,000 in closing costs then you’re left with $480,000 to pay off your mortgage. If your mortgage is $480,000 then you will be left with no equity at the end of the deal. In that case, the IRS may simply remove the lien due to the lack of equity in the home. However, if the mortgage is $420,000, then you’re left with $60,000 of home equity. The IRS may accept this amount to satisfy the lien even if you owe more than $60,000 to the IRS. If you owe less than the remaining home equity then you will be able to satisfy the lien and pocket the remaining balance.It’s important to have the right advice when navigating home selling and refinancing when the IRS is involved. At Robert V. Boeshaar, Attorney at Law, we help individuals and small businesses resolve their disputes with the IRS. If you owe more than $30,000 to the IRS, contact our firm and we’ll work with you through the process to make sure you’re not stuck behind the wall of the IRS.