Selling a Home With a Tax Lien Attached

What a tax lien actually does

A property tax lien — typically filed by the county or city after several months of unpaid property taxes — gives the taxing authority a security interest in the home that takes priority over almost everything else, including the mortgage. Most jurisdictions will not foreclose the lien for several years, but they will accrue interest and penalties at rates of 8 to 18 percent annually.

A federal tax lien — filed by the IRS for unpaid income or payroll taxes — attaches to all of the taxpayer’s real and personal property, including the home. The lien itself does not initiate foreclosure, but it does prevent any clean sale until satisfied or formally released.

A municipal lien — for unpaid water bills, code enforcement fines, or other city-imposed charges — operates similarly to a property tax lien, with rules that vary substantially by city.

How a sale clears the lien

At closing, the title company calculates the exact lien payoff (principal plus accrued interest plus any fees) and pays it directly from the sale proceeds before any funds reach the seller. Once the lien is paid, the taxing authority releases it, and the title transfers clean to the buyer.

For a home with $30,000 in unpaid property taxes that sells for $300,000 with a $200,000 mortgage, the proceeds flow as: $200,000 to the mortgage, $30,000 to the tax authority, closing costs of perhaps $10,000, and the remaining $60,000 to the seller. The seller does not need to come up with cash to pay the lien — the sale provides it.

When the lien exceeds the home’s equity

If the total of the mortgage payoff plus the liens plus closing costs exceeds the realistic sale price, the home is "underwater" with respect to the lien. In this case, the seller cannot simply close — the title company will not release a deed without the lien being satisfied.

Two paths exist. First, the IRS or taxing authority may agree to accept less than the full amount through an offer-in-compromise (federal) or a similar negotiated reduction (state and local). This typically takes 90 to 180 days to negotiate. Second, the buyer may agree to assume the lien at closing, taking the property subject to the unpaid amount, with the price reflecting the assumption. We have done both.

Why time matters

Property tax liens accrue interest at high rates and, after a statutory period (often three to five years), can be foreclosed by the taxing authority itself. The homeowner who waits until the third year of unpaid taxes to act has typically watched 30 to 50 percent of the original delinquency vanish to interest and penalties.

For an IRS lien, the agency can also levy bank accounts and wages independent of the lien itself. Selling the home and using the proceeds to satisfy the lien typically resolves the broader IRS collection activity at the same time.