Q: I’d like to do a short sale on my house, but I have a federal tax lien for underpayment of taxes in 2010 and 2011. Can I sell the home and then separately continue to pay the IRS monthly payments? I have an agreement in place with them to make these payments to pay off the tax lien.
A: Typically when a homeowner has not paid their federal income taxes, the IRS will place a federal tax lien on the property. This lien covers all property, including the home. In many cases, the IRS will remove the tax lien (from the house) by giving a Certificate of Discharge of Property from Federal Tax Lien (Publication 783).
If you have no equity in the home, the IRS doesn’t have much reason to keep the lien on the home. But you’ll still have to work with the IRS to have them release the lien. You’ll still have to continue to make your payments to the IRS in accordance with your agreement with them, but you could sell the house and move on.
Once you are able to get your bank to approve your home in a short sale, you are only halfway to selling your home. Having an IRS tax lien on your home effectively stops your ability to sell the home unless the lien is paid off or released by the IRS, since title can not be given to a new owner with ANT liens in place.
The steps go like this: Once you have an offer to purchase your home, contact your lender to begin the short sale process. At the same time, contact your local IRS office and obtain the documentation you will have to file with the IRS. The IRS will likely want to see the short sale approval letter, and may require documentation similar to what your lender will request of you.
If the IRS approves the release of the lien from your property, it will give you a letter indicating that it agrees to release the lien with certain conditions. One may be that you don’t receive any money from the sale of the home. Some lenders give a short sale seller some “relocation assistance” to make sure they don’t harm the house in the process of selling it and give a seller an incentive to move out of the home. If you receive any money from your lender relating to the short sale, you might have to turn it over to the IRS.
Just know that if you don’t work out the details with the IRS and get the letter from them agreeing to release the lien on your home, you won’t be able to close on your short sale, even if you have your lender’s approval.
Also remember that short sales can take quite a while to process with the lender, and it might take a bit of time getting the release letter from the IRS as well. Prepare yourself for all the documentation you will need to give your lender and the IRS. Your agent can give you, or direct you to, the proper forms. If you have already received an offer for the purchase of your home, you should start now compiling all the documents you will need to give the lender.
Make sure the file is complete and in the order requested by the IRS before you send it in. The easier you make it for your ngotiator, the more succesful and streamlined the process will be. You may or may not be able to send the IRS electronic documents, but if you have a good system to keep tabs on these documents, you’ll make the process of handling the paperwork easier.
For additional information and complete instructions on having and IRS tax lien released on a property, go to www.irs.gov and search for “Publication 783.”