IRS (and FTB) liens can definitely snarl a real estate transaction. However, with some astute maneuvering, they do not have to sabotage the sale of the house. Here’s what you need to know:
When there is enough equity to pay off the lien, then it must be paid off. This means equity is often reduced significantly. But if there is no equity – or not enough to pay off the lien in its entirety, then a Certificate of Discharge of Property from Federal Tax Lien can be applied for, which will essentially “lift” the lien from the property in order to allow the sale to go through. Most of the time, the IRS will demand any available proceeds go to them and the rest of the balance is still outstanding.
The Application of Certificate of Discharge of Property from Federal Tax Lien must be filed early on in the home sale process so that there is sufficient time for the IRS to process these on a “first come, first serve” basis. If the house is in foreclosure, the IRS says they will expedite the process – but their definition of “expedite” may not be fast enough.
Some critical steps must be taken by the Realtor in order to keep the sale of the house on track. Many Realtors learn about these things on the fly and as they go, since this is not something we learn in real estate school. So if you suspect there is a lien, be sure you’ve got a Realtor with experience in dealing with this.
In my office, when we take a listing, one of the documents that we have the parties fill out is called a Statement of Information (“SI”). This is part of our listing packet, and it is a basic fill-in-the blank form with name, address, former addresses, work history, marriages, and so on. The “SI” allows title to run a thorough search to dig up any liens or judgements that will prevent the title company from issuing title insurance. The result of that search is the Preliminary Title Report (“Prelim”), a term which you may have heard of before.
I want to see the Prelim as early as possible in the listing process so that we can get a head start on dealing with any of these liens. When we get a Prelim that comes back with IRS or FTB liens, we get started immediately – before the house even goes on the market, sending off the Application of Certificate of Discharge of Property from Federal Tax Lien. Hopefully, by the time the house is listed and we get an offer, the IRS has issued the Discharge so that it does not delay closing.
It is important to note that most Realtors do not run this report until they’re in escrow. In fact, most Realtors don’t run this report at all – they let the escrow company do it for them, after the offer is accepted and the sellers have committed to a contractual close of escrow date (usually 30-45 days). That is far too late in the transaction to begin the lien discharge process.
When all goes well, the lien is lifted prior to the close of escrow, and the transaction can close on time.