When a tax debt is owed to the Internal Revenue Service or State Taxing Authority, more often than not, the taxpayer wants to address the debt without having to liquidate any assets. Sometimes, the debt can be addressed through an Installment Agreement, good faith lump sum payments, or a settlement arrangement such as an Offer in Compromise. In other cases, however, the taxpayer may have no choice but to address the debt by liquidating assets. In this article, we will review the liquidation of real estate and what happens if the tax debt is paid in full or not.

Let’s use hypothetical taxpayer situations to explain two of the main options available when addressing a tax debt with real estate. For example 1, we will discuss taxpayers Michael and Stephanie Steele, who owe the Internal Revenue Service $285,000 in past-due personal income tax as reported on their Form 1040 for tax years 2020, 2021, and 2022. Michael and Stephanie hired a tax debt resolution professional upon completing their 2022 tax return when they determined another balance would be added to the total already owed for the prior two tax years.

Under the tutelage of the tax professional, Michael and Stephanie began evaluating their financial condition, their long-term goals now that their children have grown and moved out of the house, and the options available to address the tax debt. Michael and Stephanie’s primary asset is a lovely five-bedroom, three-bathroom, 3500-square-foot home on a 1/2-acre lot worth $850,000, and that they only owe $180,000 on. Knowing that the liquidation of the property will give them freedom from the ongoing tax debt issues and still give them a chunk of money to use on a new residence, they decide to sell their home.

Michael and Stephanie’s tax professional educates their realtor and her chosen title company on the ins and outs of the tax lien recorded with the County Clerk’s office to ensure they are prepared to address any questions posed throughout the sale process and at closing. The tax professional works with the title company to ensure that the payment cut to the IRS from the closing proceeds is appropriately handled for the swift release of the Federal Tax Lien from the property sold. This ensures the buyers are free of any ramifications from the IRS in the future and that Michael and Stephanie can move on with their lives. When the past-due tax debt is paid in full from the proceeds of a real estate transaction, the IRS is happy to comply with releasing the tax liens recorded!

But what happens if the past-due tax debts won’t be paid in full from the sale of real estate… can the taxpayer still sell it even if there are liens recorded that tie up the property? In short, YES, but it’s a bit of an ordeal to get done.

For example 2, let’s say our taxpayers are David and Melissa Hutchens, and they owe $200,000 in past-due personal income tax as reported on their Form 1040 for tax years 2020, 2021, and 2022. As with the couple in example 1, David and Melissa retained a tax debt resolution professional upon completing their 2022 tax return when they determined that another balance would be added to the total already owed for the prior two years.

Under the tutelage of their tax professional, David and Melissa began evaluating their financial condition and short- and long-term goals since they are both in their mid-30s and have three young children at home. David and Melissa live in the same lovely five-bedroom, three-bathroom, 3500-square-foot home as mentioned in the prior example, but they are struggling! The house is worth $850,000, but they still owe $650,000. Their monthly mortgage payment is $5,300.00, they have amassed two vehicle loans that are $1,800 per month, they owe $25,000 between all their credit cards, Melissa doesn’t work, and David’s company is discussing lay-offs in the coming months. To make their situation more stressful, the Internal Revenue Service has assigned a Revenue Officer to evaluate their financial condition for collection of the debt and is not being very kind about the intention of pushing them as hard as possible to start paying back the $200,000 owed right away.

After reviewing their financial condition, their tax professional suggests they list their home for sale as it will provide them two benefits: it will get them out of the high monthly mortgage payment and allow a chunk of money to go towards the past-due IRS taxes. David and Melissa agree, and the home is listed for sale. In this instance, their tax professional will work closely with their realtor, the future buyers and their realtor, the Revenue Officer, and the IRS Advisory Group to submit and negotiate a Certificate of Discharge of Property from Federal Tax Lien. Though this is not an easy or swift process, it will allow the property to be sold and the tax lien removed even though the sale will not full-pay the taxes owed. At the end of this transaction, David and Melissa walk away with a lighter monthly payment obligation for their household, and their tax debt is reduced by $140,000 after all closing costs are considered.

If you or your client are in a tax debt situation and believe liquidating a piece of real estate will be the best answer, reach out to the team at Golden Lion Tax Solutions. With over two decades of direct and successful experience handling tax liens and real estate transactions, we have the knowledge to navigate the process in the fastest and most amicable manner possible.

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Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.