Can The IRS Take Your Home?
How the IRS Gets a Federal Income Tax Lien On Your Home
Can the IRS Take Your Home?
Yes, the IRS can claim your home under certain circumstances–but it’s rare and only happens in situations where you refuse to pay a significant tax debt and most other collection actions have failed.
If you are a homeowner and you fail to pay your federal income taxes, the Internal Revenue Service (IRS) can place a lien on your home–and everything that you own. Once this happens, the IRS could eventually decide to foreclose on your home or get court approval to seize your home in order to collect the tax.
Does it happen often? No, but it does happen and it depends on the circumstances. In reality, the IRS most often uses the lien to get paid when you sell or refinance the home.
Key takeaways
- The IRS can take your home for unpaid taxes.
- You must owe at least $5,000 and the IRS must have exhausted other collection options.
- The IRS should not take your home if you will not be able to secure housing.
How the IRS Gets a Federal Income Tax Lien On Your Home
Most everyone who earns income must file a federal income tax return if you’re a U.S. citizen or resident alien and your taxable income is above a certain level.
If you fail to pay your federal income taxes, a federal tax lien can attach to your property including your real estate (house and or land), personal property, and financial assets. The lien arises after:
- The IRS assesses your liability,
- The IRS sends you a notice and demands payment, and
- You fail To pay the balance in full on time.
The lien amount will include the past-due taxes plus any interest, penalties, and costs they add on top.
How Federal Income Tax Liens Affect Your Home
To stake a claim to your home and other property, the IRS must file a public document called a Notice of Federal Tax Lien (NFTL) in the county records. The IRS’s lien will supersede any lien that is attached to the home after the NFTL has been filed, making it difficult to sell your home or borrow against it.
If you sell your home while there is a lien attached, the lien must be satisfied by the proceeds of the sale. When multiple liens such as mortgage liens, property tax liens, judgment liens, HOA liens, or federal tax liens exist on your home, the proceeds will get paid out based on the priority of the lienholders.
What is lien priority? Lien priority determines the order in which creditors get paid following a sale or foreclosure. The priority of the IRS lien is based on the lien’s recording date. For example, if the IRS records its lien before a judgment creditor records its lien, the IRS lien has priority over the judgment lien. In other words, the first entity to file the lien has priority.
How IRS Home Seizure Works
So if it’s uncommon for the IRS to seize a home, but still possible, what does it take for them to claim ownership of a home? Per U.S. Code 6334, the IRS has to prove that it has exhausted all other possible legal remedies to collect your tax debt. They must also send you a Final Notice of Intent to Levy and Your Right to a Hearing. They must send this notice at least 30 days prior to seizing your home.
Once they have met these requirements, the IRS can seize your home through foreclosure or by obtaining judicial approval.
IRS Home Foreclosure
Once there is a federal tax lien on the home, the IRS may foreclose. But it probably won’t. The IRS would consider foreclosing only if there is enough equity in your home to pay off any superior liens first, such as a mortgage, as well as cover the IRS balance.
The IRS will follow your state’s laws for foreclosure, and before moving forward, the IRS employee handling the case will create a report that notes that taking your home will not lead to homelessness or an inability to secure new housing.
The IRS generally doesn’t kick homeowners out of their primary residences as this gives them a very bad reputation in the media. Normally, the IRS will leave the lien on the home until you sell, refinance, or pay off the back tax.
How the IRS Can Seize Your Home With Court Approval
Alternatively, the IRS can petition the court for the right to levy your home. The taxpayer receives official notice of the petition from the IRS, which gives them the chance to respond or try to avoid seizure.
During the subsequent court hearing, the IRS presents their case and the taxpayer gets the chance to do the same. If the court determines that the IRS has exhausted all other remedies and has met legal requirements for seizure, they may allow the IRS to take ownership of the home.
How Your Home’s Equity Affects the Collection Process
The equity in your home will play a big part in how it is treated during the collection process. For example, if you own a $1 million home but only have $10,000 in equity, it doesn’t really matter what the home is actually worth–the IRS can only get $10,000 out of it. But if you own a $200,000 home outright, the IRS has a lot more room to recover your unpaid taxes from the home’s equity.
Equity is calculated by subtracting what you owe on the home from the current market value of your home. Not only does equity play a part in the seizure of your home, but it can also determine which payment options are available to you. For example, if you have a massive amount of home equity, the IRS may be less willing to consider an offer in compromise.
What Happens If You Sell or Refinance the Home
If you have equity in your home, the federal tax lien is typically paid out of the sales proceeds at the time of closing. If sales proceeds don’t cover the lien amount, you can ask the IRS to discharge the lien to allow the sale to go through.
In a refinance, you can either refinance for an amount that is sufficient to pay off the lien (if possible). However, to get approved for the refi loan, you will generally need to ask the IRS to subordinate its lien (make it secondary) to the lender’s lien to allow for the refinancing of the mortgage.
What Happens to an IRS Lien If the Mortgage Lender Forecloses on Me?
In cases where the mortgage lender recorded its lien (the mortgage) before the IRS records a Notice of Federal Tax Lien, the mortgage has priority. The IRS will only receive payment if the bank receives more than the value of its lien when it sells the property.
If no additional funds are left after the lender forecloses and auctions off the property, the federal tax lien on the home—but not the balance itself—will be wiped out in the foreclosure. You will still owe the tax debt, and the lien will still be attached to any other assets you own.
IRS May Redeem After a Foreclosure of Your Home
When an IRS lien is foreclosed, the IRS gets 120 days to “redeem” the home by paying the amount the home sold for at the foreclosure sale, plus interest and various other amounts. If the IRS redeems, it becomes the legal owner of the home.
IRS redemptions really don’t happen very often. Unless the cost to redeem is less than the fair market value of the home, there’s no incentive for the IRS to redeem. This is rarely the case. The IRS only redeems in situations where it believes the property could be resold for more than the cost of redemption and typically only if it already has a guaranteed buyer for the home. Although this outcome is unlikely, it does happen – you do not want to risk it!
Can I Get My Home Back After the IRS Takes It?
You still have a right to appeal even after the IRS takes your home, and if the IRS has already sold your home, you can file a claim to request the money back as long as you do so with two years of the levy. The IRS must release the funds or stop the seizure if you pay your taxes in full or prove that the seizure is going to cause economic hardship.
You, your heirs if you pass away, and anyone who has an interest in the home may buy back the property within 180 days of the sale. This process is called redemption, and to redeem your property after seizure, you must pay the purchase price plus interest at the rate of 20% per year compounded daily to the bidder.
For example, if the IRS auctioned off your home for $300,000 and you bought it back 100 days later, you would need to pay $316,892.
What You Can Do About a Federal Tax Lien On Your Home
You can avoid a federal tax lien by filing and paying your taxes on time. If this isn’t possible and you receive a notice that the IRS has filed a federal tax lien, you can request a review of your case called a “Collection Due Process” hearing. Your request for a hearing about a federal tax lien filing must be postmarked by the date indicated in the lien notice.
You also have the right to request a hearing when the IRS sends you a Final Notice of Intent to Levy 30 days before it plans to seize your home.
At the hearing, you may request a payment option such as:
- an installment agreement to pay your taxes in monthly installments over a period of up to six years, or
- an offer-in-compromise, which is when the IRS allows you to pay less than what you owe.
There is one way to have the lien removed through a payment plan. If you owe less than $25,000 and you enter into a Direct Debit Installment Agreement to pay back the balance in 72 months or by the collection expiration date if sooner, you may be eligible for a lien withdrawl. After three payments, you can negotiate with the IRS to have them remove the lien from the public record.
Can You Buy a Home When You Owe Taxes?
Tax debts and unfiled returns can make it challenging to buy a home, but it’s not impossible. For best results, you should file all back taxes and set up payments on tax debts. If you purchase a home while ignoring your tax debt, you risk facing liens and levies on the home.
The W Tax Group has licensed tax attorneys who are experienced and can help you quickly deal with your tax liability and any federal tax liens. We offer a 100% free tax case evaluation where we review your situation, provide you guidance, and offer you a way out.
