Buying a Home with a Federal Tax Lien

Federal tax liens are nothing to take lightly. Contrary to what many people believe, when the federal government places these liens on a property, they stay tied to the original property even if the owners no longer own it. If you wish to purchase a home which you find out has tax liens on it, you need to know the necessary steps to avoid getting stuck with the lien you had nothing to do with in the first place.

Start with a Title Search

The first step is to obtain a clear title search. The lender’s title company handles this for you and is a part of why you pay title fees at the closing. The search will turn up any liens on the property, including federal tax liens. If the title company cautions you of the liens, you must connect with the seller as well as your real estate attorney in order to clear up the situation. Generally, the seller must handle the liens before any money can exchange hands, but in some cases, the seller becomes unwilling and the attorney must handle things or you may be forced to walk away from the home.

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What are Federal Tax Liens?

Federal tax liens are unpaid federal taxes the owner of the home incurred. The lien is not the government’s first attempt at securing the owed taxes from the owner; they use many tactics before resorting to putting the property at risk. This means the owners negligently avoided their tax payments. The only entity able to remove the lien is the government and they usually wait for the responsible party to pay not only the outstanding taxes, but also the accrued interest and penalties.

Why You Should Worry about a Tax Lien

Some homebuyers figure it is no big deal to purchase a home with a tax lien on it, especially if it has been there for a long time. If the government has not done anything about the lien at this point, they figure they are safe. The opposite is true, though. Even though you are not the responsible party for the lien, the government has the right to start foreclosure proceedings on the property in order to obtain the money the owners owed them. The government does not care who owns the home now – if you purchased it with a lien on it, you are aware of the situation.

Your Lender Will Not Approve It

Even if you decide you want to purchase a home with federal tax liens, you will not be able to unless you pay cash for the home. Because you do not have to answer to anyone when you pay cash, you call the shots. This does not mean you are not at risk of losing the property if the government decides to act on its right to foreclose on the home, though. If, however, you need financing to purchase the property, no lender will willingly close on a loan on a property which has a tax lien. The title search needs to be free and clear of any liens before any lender will fund a loan.

The Need for Title Insurance

All mortgage programs require title insurance. If you pay cash for the home, you do not have to purchase an owner’s policy for title insurance, but most experts recommend it. This protects your interests in the property if someone were to stake a claim in it down the road. If there are tax liens on the property, however, most title insurance companies will not provide title insurance, which means you will not secure a loan on the property and your rights are at risk if you pay cash for the home.

Your Options for Purchasing the Home with a Tax Lien

You have several options when it comes to purchasing the home with a tax lien. The most obvious option is to walk away and find a different home. The entire process requires much more work and long waiting periods to make sure everything works out. If the seller does not want to pay the owed taxes, you have a fight on your hands. Rather than getting involved in this mess, you can walk away.

If you decide this is the home for you, hiring a reputable real estate attorney is your best bet. The attorney, who should be experienced in tax liens, will need to work with the seller and the IRS to come up with a plausible settlement which will enable the IRS to remove the lien on the property. Until they do this, you should not purchase the home. If you need financing, the lender will not enable you to close until there is a clear title search. If you pay cash, you can purchase the home, but you take a large risk in doing so.

Knowing the situation you get yourself into when you purchase a home is important for your future financial security. If purchasing a home with a risk of foreclosure does not intimidate you, then you can purchase a home with federal tax liens. However, most people avoid getting involved in such headaches and either wait until the seller resolves their tax issues or they find another property.

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JMcHood

Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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