Can a Home Be Sold With Delinquent Taxes Due?

Delinquent Property Taxes

Homeowners commonly fall behind on the state property taxes they owe on the value of their homes. When you sell a home with delinquent property taxes, the new owner is responsible for paying those taxes off; otherwise, the state can place a lien on the property. If you don't have the funds to pay off the delinquent property taxes before the closing of the sale, then most buyers will require that you reduce the asking price for the home by the amount of the tax payment so the buyers can pay it off themselves. Since this is your personal debt, you can think of this arrangement as an advance of the selling price to pay your delinquent state taxes.

As the buyer who purchases a home with a delinquent property tax debt, you need to be aware that this is not a deductible property tax on your federal tax return since it's not legally your debt to pay. Instead, the Internal Revenue Service, or IRS, treats your payment of the seller's property taxes as part of your purchase price, which increases your tax basis or investment in the home. The reasoning is that if a home is only worth $250,000 and there is a $10,000 property tax bill pending, a reasonable buyer will not provide the seller with the $10,000 without an equal reduction in the purchase price. Just like any other funds you use to purchase a home, the increase in tax basis can potentially eliminate or reduce the capital gain you pay when you sell the home.

State governments are not the only agencies that can hold up the sale of your home for a delinquent tax debt. The IRS also places liens on taxpayers' personal property, including their homes, when they have delinquent income tax debts. This tax lien provides the IRS with a security interest in the home, which makes it impossible for you to sell it until your receive a discharge or pay off your tax debt.

If you are unable to pay off your tax debt before selling your home and the buyer is unwilling to pay the taxes for you, then your only option is to request a discharge. However, the IRS will only consider a discharge when you sell the home for less than your outstanding mortgage balance. When you have equity in the home, meaning you owe less to your mortgage lender than the home is worth, the IRS may allow you to sell the home, but only if the arrangement allows for the IRS to receive payment of any funds you obtain in excess of the mortgage, up to the amount of your tax debt.