Tax issues can cause a lot of stress when it comes to your finances but can also make it more complicated when it comes to selling your Vermont house.
There are several types of liens that may be placed on your property for delinquent payments, the tax lien being the most common and challenging to clear.
A tax lien by the IRS is definitely one to be concerned about, but you do have options to get out of it.
The good news is, you may still be able to sell your house with a tax lien in Vermont, that is if you work with the right professionals. Below is everything you need to know.
What is a Tax Lien?
To dive into selling a house with a lien, it would be helpful to know what a tax lien actually is. A tax lien is a claim made on your home from either the IRS or state, local or federal government because you failed to pay your income or property taxes. This includes real estate, which means you won’t be able to sell or profit from your home’s equity without paying back your debt.
Depending on the type of back taxes you owe, you may have a property, state, or federal tax lien against your home. But property liens may also be filed for various other reasons, which may include but are not limited to:
- Unpaid HOA Fees- Usually filed by the Homeowner’s Association.
- Outstanding Payments/Debt for Services, Renovations, and Purchases- Usually filed by contractors or credit card companies.
- Outstanding Child Support Payments- Usually filed by ex-spouses.
How Do Tax Liens Impact Selling Your House?
Unfortunately, tax liens can impact selling a house. When a creditor or the IRS places a lien on your property, it serves as public notice of the claim that you owe money. Generally, the lien is filed in the county records office when it involves real estate. So in an effort to get the money, they say you owe the creditor places the lien on your home, and uses it as collateral to be used for the debt. When you have a lien on your house, it’s a big red flag to prospective buyers.
So can you sell a house with a tax lien on it? Yes, however, in order to sell your home, you’ll need to have what’s known as a “clear title.” A clear title is a title that is free of liens or disputes. The lien can usually only be cleared when the debt is paid in full- which is why so many creditors use liens, they make it extremely difficult for homeowners to sell their home if a lien exists against it.
Types of Tax Liens
The IRS or creditors may file several types of liens on your Vermont property. Below are some of the most common types of tax liens:
If you owe property taxes, the government might place a lien on your house. This type of lien generally takes precedence over other types of tax liens. If the taxes are not paid, the home could be sold in a tax sale. You and your mortgage lender might lose your interest in the property if this were to happen.
If you fail to pay your state income tax in Vermont, the Vermont Department of Revenue (DOR) might file a lien on your house.
If you owe money to the IRS, these federal tax liens are placed on your home as a result of unpaid income taxes.
Typically, you’ll be dealing with the government to resolve the tax lien, but in some cases, private entities may get involved, such as with a property tax lien.
The city of Burlington or the county can even create a tax lien certificate that can be sold to outside investors. If you fail to pay off the lien and the additional interest and penalties, the private investor can then foreclose on your house as a repayment of the debt.
However, the private investor may be more willing to work with you on the amount owed or the payment timeline. Government entities are less likely to work with people, and both the Vermont DOR and the IRS are not afraid to foreclose on your house if the tax liens aren’t paid in full.
So to avoid all that headache selling your Vermont house may be the answer, but how do you sell a house with a tax lien. The answer is coming up next.
How to Sell a House with Tax Lien
You may be wondering how to sell a house with a tax lien in VT? Although each case is different, it isn’t easy to sell a house with a lien against it in a traditional sale.
How come? Because if you list your house with a lien on it, you are not likely to find a buyer that will take on that lien. Remember, a tax lien is tied to the property, so whoever the new homeowner is will take on the debt responsibility.
Even if you could find a buyer, you should expect to make significant concessions before they take ownership and buy the property. So truth be told, it’s very difficult to sell a house with a lien attached to it without paying off the associated debt beforehand.
Below are a few of the ways you can remove the lien and officially sell your house in Vermont.
Resolve Your Debt
The best way to get rid of a lien on your house is to pay off the debt owed. But for a lot of homeowners, coming up with that much money just isn’t possible, especially if you’re in forbearance or pre-foreclosure. So one way you can possibly pay off your lien before you sell the house is with a HELOC (home equity line of credit). But this option is available if you have a lot of equity built up. Also, something else to note, you cannot wait to use equity from the completed home sale to pay it off. To deal with a tax lien, you have to do it early on, it is usually too late during the closing. In other words, you need to resolve your debt before closing – even if you plan to use that money to pay it off- or your house sale will not close.
However, if you make prior arrangements to do so, you can wait to pay off the lien at closing. You’ll need to get a lien release from the IRS and present that prior to closing. But, this isn’t a fast process and can hold up the closing. So another solution is for the lien to be paid at the closing with proceeds from the sale. The closing attorney will submit the funds from the closing to ensure the satisfaction of the lien.
So let’s say you have a mortgage on your Vermont home with a balance of $200,000. You can sell your house for $250,000, but there is a Federal Tax Lien of $20,000. Your tax attorney can arrange for that $20,000 to be paid out of the home sale proceeds at the closing.
What would happen is this: your law firm remits payment to the IRS for the total amount ($20,000) and the IRS files a release of the lien. After the tax lien and the mortgage are both paid, the amount due to you at closing would be $30,000 (minus any commissions due to your realtor and any other buyer credits).
This option could work out if you have enough equity built up. But if your profits are less than your lien amount, not only will you still be in debt, but the home sale is in jeopardy too.
Your options may come down to either paying off the debt or negotiating a deal with the home buyer. Frankly, the vast majority of buyers won’t come near a property with a lien, in fact, many mortgage lenders won’t even give loans for houses with liens.
Fortunately, you do have other options.
Apply for Subordination
Another option is to apply for a subordination agreement. With a mortgage, your lender takes a security interest in your home. If you don’t pay your mortgage, the security interest gives the creditor the right to foreclose on your property. Making your home the collateral to the lender.
Several creditors can have a security interest in the same home, but their interests are ranked according to priority. The first mortgage lender would have a higher property than the second mortgage lender, which means that they get paid first from the proceeds of a foreclosure auction.
If you have an IRS tax lien on your Vermont property, that lien will take priority over any loans you have after the tax lien exists. So creditors may not give you a second mortgage loan because their security interest will be inferior to the IRS tax lien.
So, applying for an IRS tax lien subordination would allow a new creditor to move ahead of the IRS in priority. The IRS tax lien will remain on the residence, however, it will have a lower position than the new lender’s security interest.
An IRS lien subordination won’t solve your tax debt problems, but it may help you get a loan or refinance your house, freeing up more money to pay off your tax debt.
→ Check Out These 5 Reasons Why it is Better Sell Than Refinance Your Home in Burlington.
Sell a House For Cash
For some homeowners, a lien on their property makes it almost impossible to sell. So selling a house for cash becomes the best option.
By selling a house for cash, you’ll be able to sell your Vermont house as-is. Giving you the chance to pay off debts with a portion of the sale proceeds and eliminates the need to make any repairs, inspection fees, real estate commissions, and other home selling expenses.
→ The benefits to selling a house for cash in Vermont don’t stop there, find out more in this helpful article by clicking here.
Because this process can be complicated, it’s always a good idea to rely on real estate professionals who know how to deal with the legalities of selling a property with a lien in Vermont.
In some cases, selling your house fast can not only help resolve this issue but provide a quick infusion of cash to help you get back on your feet. To make this happen, you need the help of Burlington House Buyers.
A note from Burlington House Buyers
We buy houses in Vermont and can help you sell your home quickly- at a fair price- while avoiding the issues that can come up when trying to sell a property with a lien common with traditional agents and on your own. You won’t have to go through this process alone, we’re here to help! Feel free to contact us today to get a cash offer on your house within 24-hours or learn more about how it works. We’ve been able to help many homeowners who are saying” buy my house,” or I need to “sell my house fast Burlington” by purchasing their homes, and we can help you too!
Having a tax lien on your property can be an overwhelming feeling, especially if you don’t know how to come up with the money to pay for it. But as you’ve found out, you do have several options, and selling your house with a lien is possible. However, working with knowledgeable real estate professionals is vital to help this run smoothly and for you to pay off the lien and move on to bigger and better things.
The information provided in this article does not, and is not intended to, constitute legal advice, instead, all content, information, and materials available in this article are for general informational purposes only.