Understanding Federal Tax Liens When Selling, Refinancing, or Purchasing Real Property

What a Federal Tax Lien Actually Means

When you owe the IRS more than $10,000 and fail to pay within ten days of receiving a Notice and Demand, the government can file a Notice of Federal Tax Lien. This lien establishes a legal claim against your property—all of it. Real estate, vehicles, financial accounts, and even property you acquire after the lien is filed can be affected.

The lien establishes priority for the government over most other creditors. This creates complications when you want to sell, refinance, or purchase property. But complications are not impossibilities—there are specific legal procedures for each scenario.

Selling Property with a Federal Tax Lien

If you need to sell property encumbered by a tax lien, you can request a lien discharge using IRS Form 14135. This removes the lien from the specific property being sold while leaving the underlying tax debt in place. The IRS evaluates whether the sale proceeds will satisfy or substantially reduce the tax liability. If proceeds exceed the debt, the process is straightforward—the lien is paid from the sale and released.

When sale proceeds are insufficient to fully pay the lien, the IRS may still grant a discharge if it determines the government’s interest is adequately protected. This often requires demonstrating that the property’s equity is exceeded by prior liens or that the sale price represents fair market value.

Refinancing with a Lien in Place

Refinancing requires a different approach called subordination. Using IRS Form 14134, you can request that the federal tax lien be made secondary to the new lender’s interest. The IRS considers subordination when the refinancing proceeds could partially or fully resolve the tax liability, or when subordination facilitates collection by allowing the taxpayer to reduce monthly obligations and direct more resources toward the tax debt.

This is a negotiation, not an entitlement. Presenting a clear case for how the refinancing benefits the government’s collection interest is essential to approval.

Purchasing Property Despite an Existing Lien

Here is where many lenders and even some attorneys get it wrong. Under IRS Revenue Ruling 68-57, a purchase-money mortgage automatically takes priority over an existing federal tax lien. No subordination request is necessary—the law provides this protection by operation.

Despite this clear legal authority, many lenders are unfamiliar with this rule and incorrectly require taxpayers to establish payment plans or obtain subordination before approving a mortgage. If you encounter this obstacle, having a tax attorney communicate the applicable law to your lender can resolve the issue without unnecessary delays.

Whether you’re selling, refinancing, or buying, the presence of a tax lien requires careful navigation but rarely prevents the transaction entirely. The key is understanding which procedure applies and presenting your case effectively to the IRS.