When considering a short sale, sellers and agents naturally expect the negotiations to occur between the seller and the mortgage lender(s). Unfortunately, distressed homeowners may encounter other lurking lienholders, such as the Internal Revenue Service (IRS).
IRS holds statutory lien rights which may be exercised in the event an individual or business fails to meet their tax obligations. The existence of such a lien can potentially defeat or delay an attempted short sale and cost all parties involved time and frustration. However, this issue may be resolved if addressed early in the process of the negotiations.
The purpose of IRS placing a lien on a taxpayer’s real property is to recover any proceeds realized from the sale of such property. If a seller can prove that no proceeds will be realized from a short sale due to the existence of senior liens, IRS may agree to release its lien and grant a Certificate of Discharge of Property from Federal Tax Lien (“Certificate of Discharge”). To obtain a Certificate of Discharge and release of lien necessary to allow a short sale to close, a seller must submit the proper IRS application and supporting documentation to substantiate the assertion that no proceeds will be available to satisfy the tax lien.
IRS’s review of a seller’s application may take anywhere from 30-90 days. As such, it is prudent to plan and negotiate contract deadlines and contingencies accordingly. It is critical that the homeowner resolve any outstanding lien issues in advance of receiving short sale approval. The lien release should be requested as early in the process as possible since many lenders have reduced or have eliminated granting extensions to the closing date provided in the approval letters, resulting in the approval letter expiring. A buyer should be made aware as soon as possible of this additional layer of the short sale negotiations to ensure such buyer is prepared for the potential additional necessary time to obtain the requisite lien relief.
Knowledge and preparation are crucial to successfully avoiding ancillary short sale obstacles, such as IRS liens. If uncertain as to whether a lien exists, prior to commencing short sale negotiations a seller or short sale negotiator should take an opportunity to review the public records in the county which the property lies to uncover any potential unknown IRS liens, and thereafter seek the appropriate professional advice to resolve any liens discovered.
If you have questions or concerns about real estate transactions, short sale process, or tax liens please contact us.
