What if I own a home already? If I owe money to the IRS, are they going to take my house?
Let us start by saying that, yes, the IRS can take your house. If you are living in a house, and you own that house free and clear, and you owe money to the government, the IRS is either going to want you to borrow against that asset or they could potentially seize that asset.
That is a scary thought, but for example, if you are living in a multi-million dollar home and owe the government a million dollars, they are not going to want you to continue to live in your multi-million dollar home and owe the government a million dollars, so there is going to be a little bit of give and take there.
However, the good news from the perspective of most taxpayers is, number one, it is not very popular for the IRS to kick people out of their primary residences. Seizing primary residences and kicking people out of their homes does not play out very well in the media.
The IRS does not usually seize principal residences unless there are extreme or extenuating circumstances. Number two is, there is a lot of paperwork involved in seizing a house. The IRS agents have to fill out a whole bunch of forms. Those forms have to get multiple signatures on them.
They have to go through an attorney, and they have to go through a court process in order for the IRS to foreclose in your home. That is a lot of work. The IRS agents much prefer to go after low-hanging fruit. They go after cash assets. They go after bank accounts, they go after stock accounts, they go after wages, they go after things that they can very easily seize.
While they can take your house, that is not the first play in the IRS's playbook. Generally speaking, if you are proactive in resolving your tax liabilities, your house is generally safe.
The Effect that IRS Tax Debt has on Your Ability to Refinance
As we previously mentioned, IRS tax liens extend from the time period when the tax was due and owing. The problem with refinancing is that you are essentially re-doing a loan and creating a new debt obligation on a piece of property. So with your prior loan, if you had a mortgage before the IRS filed a tax lien, there’s no risk to the existing lender because their security interest was put into place before the IRS got involved.
However, the refinance of an existing obligation changes things quite a bit. With a refinance, the old loan obligation is cancelled and whomever owns the loan would be in a subordinate position to the IRS. The lender is not going to like having their loan subordinate to a tax obligation.
In these cases, you have a couple of options. The preferred option, at least to the lender, is for you to pull cash out of your home refinance and use it to satisfy the IRS and put the lender back into a first position.
As a secondary option, the IRS may consider subordinating its interest to the lender in certain circumstances. Under the Internal Revenue Code, the IRS is able to accept a subordination when it would facilitate the payment of tax.
With a refinance, it is assumed that you are refinancing to receive a better interest rate and that, as a result of that lower rate, you are going to have to pay less to the lender every month. If you are willing to give the excess savings of the transaction to the IRS through an installment agreement, then they may approve the transaction.
Keep in mind, however, if the plan is to pull cash out of the refinance and not give it to the IRS or to not otherwise confer some benefit to them, they have no incentive to agree to let you refinance your property. Ultimately, the IRS just wants to get paid.
As you can see, tax debt is not preferred when looking to purchase a home or refinance an existing mortgage and creates a secondary complication that you are going to have to deal with in order to complete your desired effect.
This process can get complicated, especially because you are dealing with three parties with three competing priorities (you, the lender, and the IRS). However, if you have questions about this process, we encourage you to reach out to us and schedule a time to build a tax action plan.
We think that you will find through the creation of your plan that this whole process is pretty manageable if you have a knowledgeable expert able to walk you through.
Keeping Your Roof Over Your Head
The prospect of losing your home can cause many a sleepless night if you are faced with that threat. However, just keep in mind that unless there is proven fraud or other nefarious circumstances at play, the IRS isn’t going to show up in the middle of the night and throw you and your family out in the street. It is not a good look.
If you find yourself in a situation with the IRS where you feel that your basic need of shelter may be in jeopardy, call me. We have successfully counseled many clients who are facing similar circumstances.
We will exhaust all efforts of repayment options to the IRS and the odds are very high that we can find a workable solution. While our strategies will not magically erase your debt, you will be in a much better position to stay in your home and not worry about possible eviction.