Removing federal tax liens can save your real estate deals from collapsing. This is an often misunderstood topic that leads to a reduction of real estate transactions every year. You can sell a property with a federal tax lien in all of the five following scenarios:
- Sales of real estate with equity to payoff IRS back taxes in full: The fair market value (FMV) of the property is greater than the mortgage principal and therefore, there is equity.
- Sales where IRS back taxes secured by the lien will not be paid in full by the real property sale: In this case, there is some equity in the property.
- Short Sales: During periods when real estate values drop, the mortgage principal can be greater than the fair market value of the property (FMV). A property in this situation has negative equity, also known as underwater.
- Foreclosure: Real estate in various stages of foreclosure can have their federal tax liens removed.
- Bankruptcy: Federal tax liens can be removed from real estate related to a bankruptcy.
When a taxpayer fails to pay their taxes to the IRS, the government can file a Notice of Federal Tax Lien (NFTL). The tax lien attaches to all current and future assets owned by the taxpayer. It is public record filed with appropriate government agencies. Lenders and title reps will be able to find a federal tax lien filed against real estate. Many sellers think their back taxes and tax lien on their property will prevent a sale. This is false. They absolutely can sell their property and are not stuck with a property that they want to sell.
Buyers may become aware of a federal tax lien securing real property while they are under contract to purchase. It often comes as a shock and many want to back out of the deal for fear that they cannot receive clean title. This is false.
Seller's Real Estate Agent
A seller's real estate agent (Realtors) may find out that their client's property has a federal tax lien while they are under contract. The seller may think that they cannot sell and want to stop the sale.
Another scenario may arise where a seller's agent knows a real estate owner with a federal tax lien. The seller may not think they can sell the property and will not list the property with the seller's agent. The seller's agent themselves may also think that the property cannot be sold with the tax lien attached and abandon efforts to list the property.
It is important for seller's agents to know that a federal tax lien can be successfully removed from real estate. Advise the seller to be confident and attempt to secure the listing agreement. Agents with this knowledge can secure real estate listings that other agents abandon because of their lack of understanding related to federal tax liens.
Buyer's Real Estate Agent
Just as was mentioned above relating to buyers, buyer's agents (Realtors) often find out about a federal tax lien on the property that their buyer is under contract to purchase. The buyers often panic. Be the cool head in the room. Let them know that the transaction should proceed as planned and that when it is over, the tax lien will be removed and they will receive clean title to the property. Buyers do not have to walk away from their dream home with their hopes crushed and the buyer's agent can save the day if the seller's agent is unaware of the laws surrounding tax liens.
Title Reps may need to find a tax practitioner to have tax liens removed from properties in order to deliver clean title insurance and allow the transaction to close.
It benefits Mortgage Brokers to know that federal tax liens should not stop a loan deal from proceeding. Collaboration with Bank Loan Officers may be vital. Mortgage Brokers may have to advise Bank Loan Officers that the tax lien can be removed.
Bank Loan Officers
Similar to Mortgage Brokers, Bank Loan Officers should not let a federal tax lien disrupt the funding of a loan. Bring in a tax practitioner if necessary to deal with the tax lien in order to complete the underwriting process.
Currently there is mortgage forbearance on real estate owned around the United States due to the pandemic. Government policy will dictate just how severe the mortgage crisis will turn out. The Global Financial Crisis took place around 2007-2008. The US Housing Bubble burst and led to the Subprime Mortgage Crisis around 2007-2010. This triggered a wave of real estate foreclosures. The graph above illustrates the number of Notices of Federal Tax Liens (NFTL) filed by the IRS over the last two decades. The major increases in NFTL's took place in 2007-2010, the same years as the Subprime Mortgage Crisis. COVID-19 hit in 2020, but instead of NFTL's increasing, they dropped to their lowest level in the past 20 years. Why? Chiefly, because the IRS shut off their tax collection system in April 2020 out of respect for the unprecedented magnitude of challenges that US individuals and businesses faced due to COVID-19.
On June 15, 2021 the IRS resumed their collection activity and began sending out balance due notices to taxpayers with back taxes. Tax levies and Notices of Federal Tax Liens (NFTL) resumed on August 15, 2021. The chart indicates a jump in Notices of Federal Tax Liens (NFTL) in 2019. Before the pandemic hit during the beginning of 2020, the IRS was ramping up tax collection enforcement but had to shut it down in the first quarter of the year. It is possible that we could see Notices of Federal Tax Liens (NFTL) over the next few years rivaling the 2008-2011 numbers where they exceeded 1,000,000 filings in a single year. If and when that happens, any of the consumers or professionals mentioned earlier (sellers, buyers, seller's agents, buyer's agents, title reps, mortgage brokers, bank loan officers) should know how to jump over the hurdle of a tax lien and successfully close their deals.
Feel free to contact me with any questions if you or someone you know is having a tax lien issue.