The National Tax Lien Association reports that $22 billion in property taxes go unpaid each year in the United States. These large debts compel the respective counties to hold tax lien and tax deed auctions to recoup unpaid property taxes. It also shows that the overall property tax delinquency rate across the nation is 5.1%, which has increased from 4.5% in 2024 to 5.1% in 2025.
A tax lien doesn’t make a home totally unsellable. It places a legal claim on the property that must be resolved before the title can be transferred. If taxes go unpaid and unresolved, the IRS or local agencies can file a lien. Once recorded, the lien connects to the property and shows up in the public record.
Tax lien laws vary by state. For instance, selling a home in Florida with a tax lien is possible, but the lien needs to be paid off before issuing the buyer a clear title to the house. A title search should be done to identify if there are any unpaid property tax liens on the property.
For most buyers who rely on lending, the lender will not approve a mortgage on property that is burdened by a tax lien. For cash buyers, a title issue arises since the title insurance provider won’t provide coverage unless a fix or formal resolution is achieved.
Knowing the actual requirements of the lien and the available options to address it are important factors that determine if the sale will proceed, so keep reading.
Federal Tax Liens vs. Property Tax Liens: The Distinction Matters
Not all tax liens are alike. A federal tax lien is filed by the IRS when a taxpayer does not pay the owed federal tax despite being demanded by the IRS to pay off the debt.
The lien will apply to all properties owned by the taxpayer, both real estate properties and others, and a public notice of federal tax lien will be filed by the IRS.
A property tax lien, meanwhile, will arise if there are unpaid taxes on the property itself. This lien will apply to that particular property that is still owed its property tax payments.
Both types of tax liens show up on a title search and may hamper the selling process of a home, but the former tends to be more complicated than the latter.
What Happens to the Lien at Closing
Most sales involving enough seller equity follow a straightforward process: the lien is paid at closing using the sale proceeds before the seller receives any funds. The title company takes care of the payoff as part of the settlement statement.
The Internal Revenue Service, in turn, identifies the amount fit to clear the tax lien, or the mutually agreed-upon payoff. Following this, the lien is removed and the property is eligible for transfer to the purchaser.
The complication starts when the lien amount, plus the remaining mortgage balance and closing costs, ends up exceeding the sale price or gets close to it.
In those cases, the proceeds might not cover the whole lien, and the IRS will not simply take a partial check and release its claim without a formal process. This is why the IRS discharge and subordination procedures are necessary.
Federal tax liens are a kind of encumbrance that might hinder closure of a real estate transaction, but they are not the only kind of lien capable of rights protection on a property. For instance, the lack of a mechanic’s lien can have serious legal consequences. Hiring a skilled mechanic’s lien and foreclosure lawyer will guarantee that contractors, subcontractors, or architects do not go unpaid for their work. This guarantee comes once a mechanic’s lien has been enforced.
The IRS Discharge of Lien: How to Sell When Proceeds Won’t Cover the Full Debt
A lien discharge is the release of a federal tax lien on particular property that allows for the property’s sale without the elimination of the underlying tax liabilities.
The taxpayer requesting a lien discharge needs to file IRS Form 14135, including relevant documents such as the contract for sale, appraised value, title report, and closing statement. These files should be submitted at least 45 days prior to closing.
Discharge of a federal tax lien could be granted by the IRS if certain requirements were satisfied, the most common reason being that the IRS will have enough money from the sale of the property to cover its interest.
Upon approval, the IRS will send a letter stating that the lien will be discharged provided that the required payment is received at closing.
Lien Subordination: A Different Tool for a Different Situation
Subordination isn’t really the same as discharge. A Certificate of Subordination, obtained by filing IRS Form 14134, does not remove the lien from the property.
Lien subordination lets another creditor proceed ahead of the IRS for lien priority, but only for a particular transaction.
Subordination is used more often in refinancing situations, when a lender needs the top lien rank that a federal tax lien would otherwise prevent.
In a sale situation, subordination is usually less helpful since buyers and title companies tend to demand a clean, unencumbered title, not just a rearranged lien priority. IRS Publication 784 goes over the subordination process pretty thoroughly.
Payment Plans and the $25,000 Threshold
Taxpayers who owe $25,000 or less in federal tax debt may be able to use a direct debit installment agreement, in which the IRS pulls the lien from the public record. This method is different from a lien release since the debt is still there and it is still being paid down.
This distinction matters. The debt remains unpaid but withdrawing the lien clears it from the public record, often allowing a sale to proceed via standard procedures without requiring discharge.
In some cases, if the amount owed is greater than $25,000, the debtor might still have the option of a quick payment to get his balance under the required amount before appearing in court. Timing plays a key role in this option.
Installment agreements require the taxpayer to stay current on every future tax obligation during the repayment period.
How Property Tax Liens Are Handled at Closing
Local property tax liens usually take a more straightforward route than federal tax liens. Unpaid property taxes are shown during the title search, and the closing agent handles their payment from the sale funds during settlement.
The taxing authority receives the money, issues a satisfaction of lien, and then the title transfers cleanly. In property tax lien situations, the number of penalties and interest added often creates issues.
Local taxing authorities can tack on meaningful penalties to a property tax amount as time passes, and the seller may not realize the complete figure until the title search is finished.
In some municipalities, property owners can try to discuss payment of overdue taxes, including a reduction in penalties, but the actual terms vary by area.
The Unique Angle: Sellers Who Have No Equity
If the seller has no or little equity, which results from the total value of mortgages and liens being higher than the fair market value of the house, then there is a possibility that a typical sale might not produce sufficient money to clear all the debts and leave the title clean.
In such situations, the seller may be required to go for a short sale, a deed-in-lieu of foreclosure, or even an offer in compromise from the IRS, provided that the seller meets the requirements set by the IRS.
What to Do Before Listing a Home With a Tax Lien
It is important to plan ahead when it comes to selling a property with a federal tax lien against it.
First, find out the lien amount and whether the sale will cover it.
It is also good to know if you need to file a lien discharge form and if you should do that ahead of time. It takes at least 45 days to get the IRS lien discharged.
