You’ve done it! After months of saving, searching, and paperwork, you’ve found the house of your dreams. But as you proceed with the deal, you got a nasty surprise: the current owners didn’t pay their property taxes for several years, resulting in the IRS putting a lien on the house. You are in love with the property but don’t know what to do about the lien, and your realtor is advising you to walk away.
If you’re facing this stressful situation, you should understand what a tax lien is, what it takes to get rid of one, and what to do next. Keep reading to learn more.
What Is a Tax Lien?
A lien is a claim of legal right to an asset or piece of real estate in order to satisfy a debt. When a homeowner doesn’t pay the required property taxes on a home, the government can place a lien on the home as a method of collecting on the tax debt. State and local governments can place tax liens on a home as well as the federal government. When someone sells a house that has a lien on it, the lien holder does not lose their claim — the lien stays with the property.
Many people and realtors view tax liens as big red flags. Depending on how long the owners neglected to pay their back taxes, liens can be tens of thousands of dollars. You may love a house with a lien and have your realtor advise you to walk away. However, a tax lien on a house doesn’t have to be the end, as long as you have an experienced tax attorney on your side who understand liens and how to resolve them.
How Tax Liens Affect the Homebuying Process
A tax lien really only begins to affect your homebuying endeavor when you’re in the final stages of the process. Most people learn about liens on the property when they apply for a mortgage. The lending institution conducts a title search, and in that process uncovers any unpaid debts. Many homebuyers won’t purchase a home with a lien on it, so sellers can agree to use the proceeds of the sale to pay off any unpaid debts and get rid of the lien.
However, if the lien is significant, you are more likely to run into complications in the financing process. For example, if the combined total of the tax lien on the house and what the current owner owes on their mortgage is greater than your offer, they won’t have enough proceeds from the sale to cover their debts.
Another factor to consider is financing. Sometimes, liens take priority over a mortgage, meaning the IRS expects a lien to be paid off first. However, the bank or lending institution prefers for the mortgage to have priority. So, the bank may stop the approval process for a mortgage on a house when they discover a lien.
A tax lien on the property often means you won’t be able to secure title insurance. Title insurance ensures there are no liens on the property, tax, or otherwise. Without title insurance, you’re responsible for any liens on the house, not just tax liens. These liens can include other unpaid debts, like unpaid roofers or other work.
If you’re paying cash for your house, you don’t have to resolve the lien before you can purchase the home. But if you don’t negotiate a way for the sellers to resolve the lien before closing, you’ll inherit it. The government will remove tax liens after the property owner pays them in full, usually with additional fees and penalties. It doesn’t matter if you didn’t create the debt that led to the lien on the house; if you own a house with a lien, you’re responsible.
RELATED: Why Hire a Tax Attorney?
Working With an Experienced Tax Lawyer Can Help Resolve Tax Liens on Real Estate
If your dream house has a tax lien on it, it doesn’t automatically mean you should give up. When you work with an experienced tax lawyer, you can often find ways to lift the lien, obtain a mortgage, and close on the house. If you’re having trouble obtaining title insurance or have questions about resolving a lien on a house you want to purchase, it’s in your best interest to contact an experienced tax attorney who can help you identify your options and decide what to do next.
Want to Buy a House With a Tax Lien? Call S.H. Block Tax Services and Understand Your Options
Buying a house should be one of the most exciting life milestones. When tax liens are involved, it can make the process a stressful one. If you’re not ready to give up on the house of your dreams, call S.H. Block Tax Services. We have decades of experience helping home buyers like you resolve tax issues and start new lives in great homes.
To learn more, schedule a free consultation today by calling (410) 872-8376 or using the quick contact form on this page.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.