If a Notice of Federal Tax Lien has been filed against you because of unpaid and delinquent federal tax obligations, one of the effects of the lien is that it attaches itself to any real property that you are titled to within the county that the lien is filed.
A tax lien is a legal claim on an individual’s property for payment or satisfaction of a tax debt. It attaches to all property or rights to property a taxpayer currently has or acquires while the lien is still active.
Unless addressed in one of the means discussed below, the lien will remain on the property until the tax balance has been paid in full. In general, a lien is released only when a balance is full-paid or is no longer collectable. For more information, see the related article How to get a Federal tax Lien Removed.
The lien will impact any sale or disposition of the property. The Notice of Federal Tax Lien falls into date priority along with other creditors who already have a security interest in the property, such as the primary mortgage holder.
If property is foreclosed on, then any proceeds from the sale remaining after other creditors are paid will be sent to the IRS and applied against your tax balance.
If, on the other hand, you attempt to sell your property, or if you desire to access equity in your property for the purpose of refinancing or taking an equity line of credit, the lien filing will need to be addressed.
Tax Lien Discharge
If you are surrendering ownership of your property, you will want to consider requesting that the IRS discharge the property from the lien. This does not mean that the Federal Tax Lien is released from your records and credit history, but only that the particular parcel of real property is no longer encumbered by the lien.
If you desire to sell your home, and if the proceeds from that sale are less than the amount owed on the lien, a discharge will be necessary. A title search on the property will reveal the lien, and a potential new homeowner and lender will not be interested in the property if a lien is attached to it.
Earnings from the sale will still be applied to your federal tax obligations, but the discharge will allow the home to be sold and for the title to not remain clouded.
Review IRS Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien, and complete Form 14135, Certificate of Discharge.
Tax Lien Subordination
If you have significant equity in your home, and if you desire to access that equity in order to pay off the amounts owed to the IRS on the Notice of Federal Tax Lien, you will need to request that the IRS subordinate their lien.
A lien subordination means that the IRS is willing to lower the priority of their lien, or to make the lien junior to another creditor in order to allow a refinance or a home equity loan to proceed.
Without this restructuring, you will be unable to borrow funds as lenders generally want their lien to have highest priority for holding security collateral.
Review IRS Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien, and complete Form 14134, Certificate of Subordination.
More from this Contributor:
What is the difference between a tax lien and a levy?
The “What Ifs” of a financial recession
What are your rights as a taxpayer?
