How Tax Liens Work

Finances can be complicated and hard to understand, so here is a simplified version of how tax liens work. Tax liens are essentially holds put on your property if you owe taxes. When your property has a tax lien, the property does not have a clear title, which can make it difficult to sell. Tax liens are normally put on a property by the Internal Revenue Service and/or by Federal Tax Courts.

If you owe back taxes to the IRS and you cannot pay, the IRS and tax court judge can put a lien on your property. The lien acts like a note on the title of your property. It essentially means that when you sell the property, any money from the proceeds of the sale first go to the IRS to settle the lien. For example, if you owe $10,000, a tax lien for $10,000 may be placed on your property. When you sell your house for $100,000, the first $10,000 is paid to the IRS.

If a home is sold with a tax lien on it and the sale is not enough to pay off the proceeds, the tax lien follows the house. This means the new buyer would have to pay the taxes if he wanted to clear the title (get rid of the lien) and ever sell the property. This potential problem is part of the reason why a title search is required by most mortgage lenders before they will lend money to a buyer to purchase a property.

The tax lien can be removed from a home if you pay the outstanding money due to the IRS in full.

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