IRS Liens on a Short Sale

Homeowners who have an IRS lien on their house may think they don’t qualify for a short sale. The good news is that an IRS lien is not a road block, but merely a speed bump in the short sale process. An IRS lien on a house can be lifted to allow a short sale to occur, but doing so requires a bit of legwork.

After the real estate agent has negotiated a short sale with the lender, the agent must then contact the IRS and file for a discharge to have the lien on the house lifted. This requires the realtor and homeowner to complete IRS Form 14135. The seller must sign the form, but the realtor should be the one to submit it to the IRS and manage all communications surrounding the lien. (The homeowner and agent both should sign Form 2848, which will need to be submitted with the discharge application to verify that the agent is authorized to speak with the IRS on the seller’s behalf.)

Section 7 of Form 14135 asks for the basis of discharge. If you need help with this section, you can download Publication 783 from www.irs.gov for examples. You will also need to attach a copy of the deed with the discharge request, as well as a professional appraisal. The seller customarily covers the appraisal fees, which may be a few hundred dollars. This is one of the rare instances in which the seller will have costs associated with a short sale. In addition, you must submit a sales contract or a written explanation of how the property ownership will transfer and to whom.

Other items that are required together with the discharge request form include the current title report (or a list of all creditors with liens or claims against the property), and a copy of the proposed closing statement, which is typically on a HUD-1 form. This statement determines how the money from the sale will be distributed.

Applications for discharge are handled on a first-come, first-served basis, and the government is notorious for moving slowly. Do not be surprised if processing the request takes several weeks. The Advisory Office will approve or deny the request based on the application and comparisons with state and federal property rules. In negotiating short sales for hundreds of clients, we have never had the IRS deny an application to discharge a lien on a home.

Finally, keep in mind that the IRS will remove the lien from the property, but not from the individual. The homeowner will still owe the money to the IRS even though the lien has been lifted from the house so it can be sold. If you have questions about the process of applying for a lien discharge, you can view a helpful video series with step-by-step instructions in the IRS Liens section on IRSvideos.gov or call our office for assistance.

Comments 2

  1. Elias

    Our tax preparer just told us we do not quflaiy as a couple, . BECAUSE I never lived in my spouse’s home .? What? We were married in Nov 2008. Spouse bought home in 2000. We co-habitated in a rented space from marriage to Dec 2009. Saved a downpayment, and bought a house together in late Dec 2009.I would have qualified as a first time buyer. My spouse would have qualified as a long time owner. But together we are not worthy? Is our case also an unintended effect, or does the Congress really not want us to have this benefit of purchasing? This was a really a nasty surprise.

  2. John

    Elias,

    Find a new tax preparer.

    Over the years I have learned that most people in real estate industry and related real estate professions tend to be very conservative. Schools and training they attend usually teach “what to avoid” and “what not to do” verses “how to work with unusual or difficult problems”. Therefore, these people take the stance of “no”, “you can’t do this”, “not qualified”, or “not approved”. It is easy and low risk.

    Go find a new tax preparer that knows the business, does they job because he wants to help, and is willing to push the envelope.

    John

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