Can You Buy a House If You Owe the IRS?

While owing the Internal Revenue Service (IRS) introduces complexities, it does not automatically prevent an individual from purchasing a house. Successfully navigating this situation requires understanding federal tax liens, their impact on mortgage qualification, and available IRS programs to manage or resolve tax liabilities.

Understanding Federal Tax Liens

A federal tax lien is the government’s legal claim against a taxpayer’s property when a tax debt remains unpaid. This claim arises after the IRS assesses the tax, sends a notice and demand for payment, and the taxpayer fails to pay. The lien secures the government’s interest in all of a taxpayer’s current and future property, including real estate, personal property, and financial assets.

To alert other creditors and the public, the IRS files a Notice of Federal Tax Lien (NFTL). This document is recorded in public records, making the lien discoverable during property title searches. The NFTL provides public notice of a lien that already exists. The presence of a federal tax lien affects a taxpayer’s financial standing and ability to engage in property transactions.

Navigating Mortgage Qualification with IRS Debt

IRS debt, especially a filed federal tax lien, impacts a borrower’s ability to qualify for a mortgage. Lenders assess financial health, and IRS obligations are a factor in this evaluation. A metric lenders examine is the debt-to-income (DTI) ratio, which includes all recurring monthly debt payments. Payments on an IRS Installment Agreement are factored into this ratio, influencing loan qualification.

While tax liens may no longer appear on credit reports, they remain public records. The public nature of a tax lien signals a history of not meeting financial obligations, which can make lenders hesitant or lead to less favorable loan terms. Lenders require any IRS debt to be formally managed or placed on a structured payment plan before approving a mortgage. This ensures the mortgage is not jeopardized by outstanding tax obligations.

Title companies conduct title searches to identify claims against the property. When a federal tax lien is discovered, the title company requires it to be addressed to ensure a clear title can be conveyed. This means the lien must be released or subordinated to the new mortgage, protecting the lender’s priority.

Resolving IRS Debt for Home Purchase

Several programs are available to manage or resolve tax debt when buying a home. An Installment Agreement (IA) allows taxpayers to make monthly payments for up to 72 months. To apply, use the IRS Online Payment Agreement tool or submit Form 9465. While interest and penalties accrue, an approved IA demonstrates to lenders that the debt is managed, which can help with DTI calculations. A setup fee may apply, but it can be waived for low-income taxpayers.

An Offer in Compromise (OIC) allows taxpayers to settle tax debt for a lower amount than originally owed. This option is considered when there is doubt about the collectibility of the debt or when collection would cause economic hardship. The application process involves submitting Form 656, along with Form 433-A (for individuals) or Form 433-B (for businesses). An application fee and an initial payment are required, though exceptions exist for low-income applicants. While an OIC is pending, collection actions are suspended, but the process can be lengthy.

When a federal tax lien is present, subordination may be necessary for a mortgage. Subordination allows another lien, such as a new mortgage, to take priority over the federal tax lien without removing the tax lien itself. This is important for lenders who require a first-priority lien.

The IRS may grant subordination if it facilitates tax collection or improves the taxpayer’s ability to pay. To request subordination, taxpayers must submit Form 14134. The IRS advises submitting this application at least 45 days before the transaction date.

A Notice of Federal Tax Lien can be withdrawn in some circumstances. A withdrawal removes the public record of the lien, though the underlying tax liability remains. This can occur if the notice was filed improperly or if the taxpayer enters a Direct Debit Installment Agreement (DDIA) and makes three consecutive payments. Taxpayers can apply for a withdrawal using Form 12277.

A federal tax lien is released when the tax liability is satisfied or becomes legally unenforceable. Upon full payment, the IRS issues a Certificate of Release of Federal Tax Lien, generally within 30 days. While this removes the IRS’s claim, a public record of the lien may persist unless a withdrawal is also granted.