How a Federal Tax Lien Affects Your Ability to Sell Property or Refinance

Overview

A federal tax lien (often recorded as a Notice of Federal Tax Lien, or NFTL) notifies creditors, title companies, lenders, and potential buyers that the U.S. government has a legal claim to your property because you owe federal taxes. That public claim “clouds” the title and is one of the most common reasons closings and refinances are delayed or canceled.

This article explains how an NFTL affects the sale and refinance process, the practical options to resolve or work around a lien, what lenders and title companies typically require, and steps I use in practice when helping clients recover control of their property.

(Author note: In my 15 years advising clients on tax collections and real estate closings, timing and documentation are the two most frequent reasons a sale or refinance fails when an NFTL exists.)

How a lien shows up in a real estate transaction

• The NFTL is filed in county land records and appears on standard title searches. A title company will flag the NFTL and will generally refuse to insure the title unless the lien is resolved or an agreed workaround is in place.
• Lenders view the IRS lien as a superior claim to many private mortgages. Because the IRS lien takes priority based on the date of filing and assessment, most mortgage lenders will not fund a refinance or purchase until the lien is released, paid at closing, or subordinated.
• Buyers are often unwilling to accept a property with an unresolved federal lien because they may inherit title complications; this can reduce buyer demand or force buyers to request lien payoff at closing.

Authoritative sources: IRS “Understanding a Federal Tax Lien” (https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien) and IRS guidance on levies and seizures (https://www.irs.gov/businesses/small-businesses-self-employed/levies-and-seizures).

Typical effects on selling a home

1. Delayed closing: Title companies require a lien resolution or a plan to pay the lien at closing. Without documented proof, escrow agents will not release funds.
2. Reduced pool of buyers: Many buyers won’t accept closing conditions that involve federal claims on the property.
3. Proceeds withheld: If the sale closes, the lien can be satisfied from the sale proceeds—often only after the title company or closing agent receives a payoff amount from the IRS and confirms procedures.
4. Lower net proceeds: Paying off the lien at closing reduces how much you walk away with; negotiation costs and delay can also reduce net gain.

Practical example from my practice: A seller listed a home during a hot market but an NFTL appeared in the title search a week before closing. The buyer demanded the lien be paid from sale proceeds or the sale would cancel. We requested an IRS payoff and arranged payment at closing; however, the delay cost the seller two weeks of carrying costs and a lower post-closing cash position.

Typical effects on refinancing

• Lenders will usually require that liens be cleared or subordinated before approving financing because the IRS lien could be paid from any future sale or foreclosure proceeds.
• Some lenders will accept a payoff of the lien from the refinance proceeds (payoff at closing) if title and underwriting verify the IRS payoff amount and the closing agent will disburse funds to the IRS.
• Other lenders may require the lien be released before funding. That requirement is more common with conforming mortgages and government-backed loans.

Key point: Different lenders have different policies—some accept a payoff at closing, others require a recorded Certificate of Release before funding. Ask the lender early and document their requirement in writing.

Options to resolve or manage a lien before closing or refinancing

1. Pay the lien in full

• Full payment triggers the IRS to file a Certificate of Release of Federal Tax Lien. Typically this filing occurs within a short period after payment (IRS guidance notes the release is recorded after the liability is satisfied).
• Payoff amounts can be requested from the IRS to provide exact figures to the title company or closing agent.

1. Installment Agreement

• If you can’t pay in full, the IRS may accept an installment agreement. Some lenders accept loan closings if the borrower provides evidence of a direct installment agreement and the IRS agrees to a payoff at closing. The IRS also may consider withdrawal or subordination decisions when an installment agreement is in place.

1. Offer in Compromise (OIC)

• An OIC settles tax debt for less than the full amount when the IRS determines collection of the full amount is unlikely. OICs take time to process and are not a quick closing solution, but when accepted they resolve the underlying lien.

1. Subordination

• The IRS can subordinate its lien to allow a new mortgage to have priority over the NFTL. Subordination doesn’t remove the lien — it simply changes lien priority. This option can help with refinancing but does not reduce the dollar amount owed.

1. Withdrawal of the NFTL

• In limited situations (e.g., when the notice was filed in error or when withdrawing the filing will facilitate collection via a specific agreement), the IRS can withdraw a filed NFTL. A withdrawal removes the public notice and can clear title for closing, but the taxpayer must still resolve the debt. See FinHelp’s guide to withdrawing and subordinating liens for more (“Resolving Tax Liens: Removal, Withdrawal, and Subordination”).

1. Lien payoffs at closing

• Often the most practical path for sales: the buyer’s lender or the closing agent sends proceeds to the IRS to satisfy the NFTL. This requires an IRS payoff statement and coordination with the title company.

For more on structured IRS programs and business liens, see “How the IRS Fresh Start Program Affects Business Tax Liens”.

How title companies and lenders typically proceed

• Title companies will not issue title insurance covering an outstanding NFTL unless it is expressly addressed. They may insist on a recorded Certificate of Release, a subordination agreement, or a written IRS payoff statement approved for closing.
• Mortgage underwriters will list the NFTL as a condition to funding. Lender requirements vary by investor (Fannie/Freddie, FHA, VA) and by investor overlays — so get lender direction early.

Practical checklist before listing or applying to refinance

• Order a current title search and a tax account transcript from the IRS (you can request transcripts online or through a tax professional).
• Request an IRS lien payoff letter (ask the IRS collections specialist assigned to your case or call the IRS lien unit for your state). Title companies often require a written payoff amount.
• Ask your lender whether they will accept payoff-of-lien-at-closing, or whether they require lien release/subordination.
• Explore installment agreements, OICs, subordination, or withdrawal with a tax professional.
• Document every IRS communication in writing; keep copies of agreements, IRS confirmation letters, and payment receipts.

Timeline and limitations

• A federal tax lien generally stays in effect until the tax debt, penalties, and interest are paid, a withdrawal is granted, or it becomes unenforceable (typically 10 years from the date of assessment, subject to extensions). Check the IRS page for current statute of limitations details.
• After full payment, the IRS typically files a Certificate of Release; the title company needs to record that release to clear the public record.

Common mistakes I see

• Waiting until a buyer is under contract to check title—order a title search early.
• Assuming a lender will automatically handle an NFTL—lenders have different policies; get written confirmation.
• Ignoring IRS notices—prompt contact can create options like installment agreements that reduce friction at closing.

When seizure is a real risk

Seizure and forced sale by the IRS is rare for primary residences, but it is possible if the liability remains unpaid and collection efforts escalate. The IRS generally pursues liens and levies in stages and has collection due process protections; see IRS levies and seizures guidance for details.

Examples and outcomes

• Selling with payoff at closing: sale proceeds disburse to IRS and lien is released—closing completes, but seller net is reduced.
• Refinance with subordination: the lender agrees to new mortgage priority and the IRS stays subordinate—borrower keeps debt to IRS but secures refinancing.
• Withdrawal or compromise: NFTL removed or reduced, title cleared, transaction proceeds with minimal delay.

Links to related FinHelp content

• “Understanding Tax Liens: Filing, Release, and How They Affect Credit” (https://finhelp.io/glossary/understanding-tax-liens-filing-release-and-how-they-affect-credit/)
• “Resolving Tax Liens: Removal, Withdrawal, and Subordination” (https://finhelp.io/glossary/resolving-tax-liens-removal-withdrawal-and-subordination/)
• “How the IRS Fresh Start Program Affects Business Tax Liens” (https://finhelp.io/glossary/how-the-irs-fresh-start-program-affects-business-tax-liens/)

Final recommendations

• Do not list or apply for refinance without a current title search and an IRS payoff or settlement plan.
• Contact the IRS early and get written confirmation of any agreement. Engage a tax professional (CPA, EA, or tax attorney) to negotiate complex actions like OICs, withdrawals, or subordination.

Professional disclaimer: This article is educational only and does not constitute tax, legal, or financial advice. For decisions about your specific tax liabilities and real estate transactions consult a licensed tax professional or attorney.

Authoritative references

• IRS: Understanding a Federal Tax Lien (https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien)
• IRS: Levies and Seizures (https://www.irs.gov/businesses/small-businesses-self-employed/levies-and-seizures)
• Consumer Financial Protection Bureau: What is a tax lien? (https://www.consumerfinance.gov/ask-cfpb/what-is-a-tax-lien-en-1489/)