Can You Buy a House With a Federal Tax Lien?

You can buy a house when there’s a federal tax lien in the picture, but the lien has to be cleared or restructured before closing. That’s true whether the lien belongs to the seller or to you as the buyer. Buying a house with a federal tax lien involved usually means adding 45 to 90 days to the timeline and using one of the IRS’s formal procedures — a payoff, a discharge, a subordination, or a withdrawal — to get the property to a place where a lender will finance it and a title company will insure it.

Why a Tax Lien Blocks a Home Sale

A federal tax lien attaches to everything the taxpayer owns, including real estate.¹ Once the IRS files a Notice of Federal Tax Lien in the county where the property sits, the lien is public and enforceable against buyers, lenders, and other creditors.²

That creates two problems for a sale. First, mortgage lenders won’t lend against a property carrying an unresolved federal lien, because the government’s claim can outrank the lender’s security interest. Second, the title search will flag the lien, and the title company will refuse to insure over it. Since almost every mortgage requires title insurance, the transaction stops there until the lien is dealt with. A cash buyer runs into the same wall on the title-insurance side.

How the Seller Can Clear the Lien Before Closing

The IRS has three main procedures for getting a lien out of the way of a real estate sale. Which one fits depends on the amount of equity, the size of the tax debt, and what the seller can bring to closing.

Pay the Lien Off at Closing

If the sale proceeds are enough to cover the mortgage, closing costs, and the full tax debt, the cleanest path is to pay the IRS from the seller’s proceeds. The closing agent wires the payoff, and the IRS is required to issue a Certificate of Release within 30 days of full payment.³ That certificate is recorded in the same office where the lien notice was filed, and the property is clear.⁴

Apply for a Discharge

A discharge takes the lien off the specific property being sold without wiping out the underlying debt. The lien continues to attach to the seller’s other assets.⁵ The seller applies on Form 14135.⁶

The IRS will grant a discharge in several situations. The most common in a home sale is when the seller pays the IRS at least the amount of the government’s interest in the property — the equity remaining after senior liens and settlement costs. A discharge is also available when the seller’s other property still subject to the lien is worth at least twice the outstanding debt, or when sale proceeds are held in escrow subject to the government’s claim.³⁷

Apply for a Subordination

Subordination doesn’t remove the lien. It moves the IRS’s claim behind another creditor, usually the buyer’s mortgage lender, so the lender ends up in first position. The application is Form 14134.⁸ The IRS agrees to subordinate when it receives an amount equal to the interest being subordinated, or when it decides subordination will ultimately improve its ability to collect.³ Subordination shows up less often than discharge in ordinary sales, but it can be the right tool when the seller intends to keep paying the IRS on an installment agreement after closing.

Build IRS Processing Time Into the Contract

Publication 783 tells applicants to submit discharge requests at least 45 days before the planned closing date, and that’s the minimum.⁷ Missing documentation or a busy IRS Advisory Group can stretch the wait further.

If you’re the buyer, write this into your purchase contract. A 30-day closing is not realistic on a property with a federal tax lien. Ask for a closing date 60 to 90 days out, and include a provision letting you extend if the IRS takes longer to process the discharge or subordination. Without that cushion, your earnest money can sit tied up while the paperwork moves at its own pace.

Buying a House When You Have a Federal Tax Lien

If the tax lien belongs to you, the question shifts from clearing title to getting approved for a mortgage. Two things determine your options: whether a Notice of Federal Tax Lien has been publicly filed against you, and whether you’re on an active repayment plan with the IRS.

FHA Loans

FHA guidelines give borrowers with tax debt the most room. You can qualify if you’ve entered a repayment agreement with the IRS and can document that you’re current on payments. Paying the balance in full before applying isn’t always required, but you’ll need written proof of the agreement and a payment history. Individual lenders can add their own overlays, so approval standards vary within the FHA program.

Conventional Loans

Conventional financing is tighter. Fannie Mae generally allows a borrower on a federal tax installment agreement if no Notice of Federal Tax Lien has been filed in the county where the property is located, and the monthly IRS payment gets counted in your debt-to-income ratio. Once a lien notice is on record, most conventional lenders want the debt paid in full before closing.

Ask the IRS to Subordinate

You can apply for subordination on your own behalf using Form 14134, the same form sellers use.⁸ If the IRS agrees to step behind the new mortgage, the lender gets first position and may move forward with the loan. The IRS considers subordination when it believes the arrangement will help it collect — for example, when buying and stabilizing housing supports your ability to keep up with installment payments.

Ask for a Lien Withdrawal

A withdrawal is different from a release or a discharge. A release means the debt is paid; a discharge frees a specific property; a withdrawal removes the public Notice of Federal Tax Lien while the debt is still owed. The lien technically remains, but without the public filing, it won’t surface on title searches or trigger an automatic lender rejection. The form is 12277, and the IRS may grant a withdrawal if you’ve entered a direct debit installment agreement or if withdrawal will help you pay the debt faster.⁹

The Role of the Closing Agent and Title Company

On a transaction involving a federal tax lien, the closing agent is doing more than usual. The agent verifies the payoff figure with the IRS, withholds the right amount from the seller’s proceeds, confirms the IRS has issued the correct certificate (release, discharge, or subordination), and gets that certificate recorded in the county records.

The title company won’t issue a final policy until it can confirm the lien is resolved on its end. For a full payoff, that means waiting on the Certificate of Release. For a discharge, it means receiving and recording the Certificate of Discharge. The extra work — coordinating with the IRS Advisory Group, tracking down certificates, recording documents — typically means a higher title bill than a standard closing. Address in the contract who pays those additional costs; sellers often absorb them as part of the deal to get the lien cleared.

Buying at a Foreclosure Sale: The IRS Right of Redemption

One boundary worth knowing if you’re bidding on a foreclosed property. When real estate is sold to satisfy a lien senior to the IRS — a first-position mortgage foreclosure, for instance — the IRS has 120 days from the sale date, or a longer period if state law provides one, to redeem the property by paying the sale price plus certain costs.¹⁰¹¹ The IRS almost never uses this right on residential property, but it creates a 120-day cloud on title after the foreclosure sale, and title insurers typically wait out that window before issuing coverage.

1
Internal Revenue Service. Topic No. 201, The Collection Process
2
Office of the Law Revision Counsel. 26 U.S. Code 6323 – Validity and Priority Against Certain Persons
3
Office of the Law Revision Counsel. 26 USC 6325 – Release of Lien or Discharge of Property
4
Internal Revenue Service. Publication 1450 – Instructions for Requesting a Certificate of Release of Federal Tax Lien
5
Taxpayer Advocate Service. Release of Notice of Federal Tax Lien
6
Internal Revenue Service. Form 14135 – Application for Certificate of Discharge of Property from Federal Tax Lien
7
Internal Revenue Service. Publication 783 – How to Apply for a Certificate of Discharge From Federal Tax Lien
8
Internal Revenue Service. Form 14134 – Application for Certificate of Subordination of Federal Tax Lien
9
Taxpayer Advocate Service. Withdrawal of Notice of Federal Tax Lien
10
Office of the Law Revision Counsel. 26 USC 7425 – Discharge of Liens
11
Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien