Guest post by Laurel Starks, CEO & Founder, The Ilumni Institute
IRS liens can be bombshells in cases where clients are banking on the equity from their property to pay for debts and to bankroll their future. There’s nothing like calculating a few hundred thousand dollars in equity, only to learn there is an outstanding jumbo IRS lien that is going to absorb most or all of it.
Here are a few things to know about IRS liens so that you and your clients are prepared to deal with them should they arise:
IRS liens do not typically show up on basic searches or property reports like the Property Profile. Rather, they appear on the more invasive Preliminary Title Report (“Prelim”). In most real estate transactions, prelims are not run until after the listing agreement has been signed or once a property is under contract with buyers. This is pretty late in the game to learn that there is a substantial reduction in equity—or possibly no equity at all.
I always recommend that attorneys run the prelim as early as possible in their cases. Title companies usually charge for prelims if they are not affiliated with a listing contract, but if your clients do not wish to pay, then at the very least they should insist that their REALTOR® run one as soon as they’ve been referred to the case.
(Note: As your CDRE™, I will place an order for a prelim immediately upon notification of a new case.)
The IRS, as we all know, expects to be paid. However, if the amount of the lien plus the costs of the sale exceed the available equity, the IRS will most likely discharge the lien and allow the sale to go through. (Discharge means the IRS removes the lien from the property so that it may transfer to a new owner free of the lien.) The remaining balance will probably still be due.
For example, a house is valued at $400,000. After figuring the mortgage balance and costs of the sale, there is $75,000 in equity. A $100,000 IRS lien is discovered which puts the sale underwater by $25,000.
The IRS should be contacted and appropriate forms should be submitted, including an Estimated ALTA Settlement Statement, proving there is not enough equity to cover the full payoff of the IRS lien. (IRS contact can be initiated by the client or a tax professional. Sometimes title companies and REALTORS® can help.)
Once processed and approved, the IRS will issue an updated demand and notice for a partial payoff of the balance that comes from the equity.
Sometimes, the IRS will allow the parties to enter into a payment arrangement.
The IRS does not move quickly, especially with the pandemic impact. These lien releases can take weeks or months (assume months) to complete, and that can have a major impact on the salability of the property. It can also make a buyout refinance moot.
For more information, visit the IRS website on this issue:
“What if there is a federal tax lien on my home?”
Should you have any questions about this or any other real estate related issue in your case, please do not hesitate to contact me. Also, remember to mark your calendar for the 4th Wednesday of every month 12:00 - 1:15 PST / 3:00 - 4:15 EST for our Raising the Bar MCLE series. It’s always complimentary to divorce attorneys with my guest pass!
Request your invitation here, but be sure to reach out to me first so I can give you your FREE discount code!)
Lastly, should you have any questions about real property matters in your cases, please keep my number handy and give me a call anytime.
CDRE, SRES, CDPE, CLHMS, GPS
Los Gatos, CA
SHANNON ROSE/ROSE GROUP
KW BAY AREA ESTATE
16780 LARK AVE.
LOS GATOS, CA 95032