Can You Sell a House With a Federal Tax Lien?

The short answer? Yes. You can sell a house with a federal tax lien attached to it, but you must address the lien at or before closing. When the property goes under contract, the title company runs a title search, finds the lien in public records, and lists it on the preliminary title report as an encumbrance. Most lenders won’t fund the buyer’s mortgage until it’s resolved, so the sale can’t close with a lien still attached.

However, there’s more than one way to resolve a tax lien during a real estate transaction. Which option works best depends on how much equity you have in the property relative to what you owe on the mortgage. Tax Network USA works with taxpayers, their real estate agents, and title companies to sort out lien issues before they derail a closing.

Key Takeaways

• A federal tax lien won’t block a sale outright, but you must resolve it before or at closing.
• The title company will find a federal tax lien during a standard title search; you can’t hide it from the buyer’s lender.
• Paying off the lien from sale proceeds is the simplest fix when there’s enough equity to cover it.
• A lien discharge (Form 14135) only removes the lien from the property being sold, even if the debt isn’t paid off in full.
• Timing matters – you must submit a discharge application at least 45 days before closing.
• California sellers may also deal with an FTB lien, which follows a similar but separate process from the county recorder or Secretary of State.

How Title Companies Find Liens

Once a property goes under contract, the title company opens a title search to check for anything attached to the property that might block a clean transfer of ownership. According to IRS Publication 594, federal tax liens are filed with the county recorder in the county where the property sits, so those liens appear in the same public records search as a mortgage or judgment.

The title company lists the lien on the preliminary title report as something to be cleared before the title can pass to the buyer. Lenders generally won’t fund a purchase loan on a property with an open federal tax lien because the lien gives the IRS a claim against the property that can outrank the lender’s own interest. If you’re selling and facing this situation, choosing the best option to resolve it depends largely on how much equity the property has.

Option 1: Pay Off the Lien at Closing

If the property has enough equity to cover the existing mortgage and the total lien amount, this option might work. The title or escrow company pays the IRS first, any remaining balance goes to the seller, and the transaction closes on the planned date.

According to IRC Section 6325(a), the IRS must release a lien within 30 days of receiving payment in full. Confirm with the title company that the IRS recorded a Certificate of Release, which clears the lien from public record.

Option 2: Lien Discharge From the Specific Property

When there isn’t enough equity to pay off the lien completely, a discharge can still make the sale possible. A discharge removes the lien from one specific property while keeping it attached to any other assets the taxpayer owns. It’s not a full lien release, merely a release for that one bit of real estate.

The IRS typically grants a discharge when sale proceeds are applied to the tax debt – or when there’s no equity in the property for the IRS to collect against anyway. You must complete and submit IRS Form 14135, Application for Certificate of Discharge of Property From Federal Tax Lien at least 45 days before your anticipated closing date. If you don’t make that deadline, there’s a good chance you’ll have to delay the closing because the IRS received the discharge application too late to process it.

If the IRS approves your request, the title company receives a Certificate of Discharge specific to the property, and the sale can move forward with the buyer taking a clear title.

Option 3: Lien Subordination to Allow Refinancing

Subordination applies more to refinancing than to an outright sale. Lien subordination doesn’t remove the lien – it moves the IRS behind the new lender in priority, giving the lender the first position needed to fund the loan. This option can open the door to a refinance where a new loan pays down the tax debt, which can eventually lead to a release.

You’ll need to submit IRS Form 14134, Application for Certificate of Subordination of Federal Tax Lien, under the authority in IRC Section 6325(d).

Option 4: Resolve the Underlying Debt Before Closing

Some sellers use a property sale to fund a broader resolution of their tax debt. They may be looking to do an Offer in Compromise or an Installment Agreement. If a taxpayer qualifies for a direct debit installment agreement and later requests a withdrawal using IRS Form 12277, the Notice of Federal Tax Lien can drop off the public record. That outcome differs from a release, which satisfies the debt but still appears on the public record as a lien that once existed.

This option takes more time than a lien discharge and may not be feasible for a seller with a firm closing date. A tax professional can help you determine whether this option fits your timeline before you commit to it – contact us about our tax lien resolution services.

What If There’s No Equity in Your Home?

It’s common for a property to be worth less than the mortgage balance and tax lien combined. If that’s the case, the IRS can grant a discharge for no consideration, since there’s no equity for the government to collect against. The sale can still close, and the buyer still gets a clear title.

The IRS simply receives zero proceeds from the sale. Sellers in this position must typically document the property’s value against whatever’s attached to it, using an appraisal or an estimated closing statement, as part of the IRS Form 14135 application. The IRS scrutinizes these sales so you can’t cheat the system by selling your home to someone close to you for less than market value to bypass the lien.

How Long Does Lien Removal Take?

A payoff at closing usually follows a normal escrow schedule, with the 30-day IRS release window running after payment. A discharge application, however, will probably take longer. The IRS requests at least 45 days’ notice before closing, and longer during peak periods. Subordination and withdrawal requests typically take even longer.

The most common problem sellers encounter isn’t the difficulty of any of the options; it’s not identifying the lien until the title search uncovers it, leaving them with little time to apply for a discharge before the scheduled closing date.

What Are California FTB Liens?

People selling property in California sometimes have a state tax lien from the Franchise Tax Board (FTB) stacked on top of a federal one. FTB liens follow a similar path but aren’t the same filing. They’re recorded with the county recorder or the California Secretary of State and must be resolved before or at closing, just like a federal lien.

A lien release is generally recorded no later than 40 days after you pay a liability in full. The FTB has its own discharge and subordination processes, separate from the IRS, so a seller dealing with a federal and a state lien must manage two parallel processes simultaneously. You need FTB representation to resolve these state tax liens.

How Tax Network USA Can Help You

We start by identifying the lien issue as early as possible, ideally before the title search finds it and puts the closing timeline at risk. Our enrolled agents, CPAs, and attorneys work out which resolution fits your situation a payoff, discharge, subordination, or withdrawal tied to a broader resolution of the debt – and then prepare and submit the application, communicating with the IRS on your case.

We coordinate with the title company and escrow to align the process with the closing date. When a California seller has an FTB lien in addition to a federal one, we can handle both concurrently.

A federal tax lien often isn’t the only collection action attached to a taxpayer’s account. It’s often paired with a bank levy or wage garnishment. If that’s part of your situation, we can pursue relief along with the lien resolution rather than treating them as separate cases.

Frequently Asked Questions

How long does an IRS lien discharge application take to process?

The IRS asks that you submit Form 14135 at least 45 days before your anticipated closing date, and recommends more lead time when possible, since processing can take longer during high-volume periods.

Can a buyer purchase property without the seller resolving the lien first?

In practice, no most lenders won’t fund a mortgage on a property with an open federal tax lien on title, so the lien must be released, discharged, or otherwise resolved before the transaction can close.

Does the lien affect what the seller receives at closing?

Yes. Paying off the lien with sale proceeds is prioritized over the seller receiving any remaining equity. If a discharge is granted for no consideration because there isn’t any equity, the seller may not receive additional funds from that portion of the transaction, either.

What’s the difference between a lien discharge and a lien release?

A discharge removes the lien from one specific piece of property while it stays attached to the taxpayer’s other assets. A release ends the lien entirely because the underlying tax debt has been paid or settled, or isn’t legally collectible any longer.

Do I need a lawyer to help handle a lien issue on my house before selling?

Not necessarily. This process requires documentation and coordination preparing the right forms, gathering supporting records, and communicating with the IRS or FTB on the timeline. Tax Network USA’s enrolled agents, CPAs, and tax attorneys handle these applications with the IRS and FTB as your advocates.

A Tax Lien Doesn’t Have to Impact Your Sale

If a property you’re trying to sell or refinance has a federal or state tax lien attached, the sooner you address it, the more options you have. Tax Network USA works with lenders, their agents, and title companies to sort out federal and state tax liens before and during property transactions.

We offer a free confidential consultation to review your specific situation. Get help with a tax lien on your property.

Sources:

• IRS, Topic no. 201, The Collection Process — irs.gov/taxtopics/tc201
• IRS, Publication 594, The IRS Collection Process — irs.gov
• IRS, Publication 1450, Instructions for Requesting a Certificate of Release of Federal Tax Lien — irs.gov/pub/irs-pdf/p1450.pdf
• IRS, Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien — irs.gov
• IRS, Form 14135, Application for Certificate of Discharge of Property From Federal Tax Lien — irs.gov
• IRS, Form 14134, Application for Certificate of Subordination of Federal Tax Lien — irs.gov
• IRS, Form 12277, Application for Withdrawal of Filed Notice of Federal Tax Lien — irs.gov
• 26 U.S. Code § 6325 — Release of lien or discharge of property – https://www.law.cornell.edu/uscode/text/26/6325
• Taxpayer Advocate Service, Release of Notice of Federal Tax Lien (Lien Release) — taxpayeradvocate.irs.gov
• California Franchise Tax Board, Liens — ftb.ca.gov/pay/collections/liens/
• California Franchise Tax Board, FTB Pub. 1140, Personal Income Tax Collections Information — ftb.ca.gov/forms/misc/1140.html