Selling a House With Liens or Back Taxes: How Liens Get Paid at Closing

Can you sell a house with liens on it?

Yes. A lien does not block a sale. It just means someone has a legal claim against the house that has to be paid before the buyer gets clean title.

At closing, the title or escrow company takes the buyer's money, pays off every lien, pays the closing costs, and sends you what remains. You do not usually need to pay liens out of pocket first. The only time you need cash at closing is when the liens and costs add up to more than the sale price.

How do liens get paid at closing?

Liens get paid in a set order from the sale money before you receive anything. Here is how it works in a typical sale:

1. Title search. The title company searches county records for every recorded lien, judgment and unpaid tax tied to the property and to you.
2. Payoff requests. They ask each lienholder for a written payoff amount good through the closing date. For most mortgages, the servicer must send a payoff statement within seven business days of a written request.
3. Settlement statement. Every payoff shows up as a line on your closing statement, so you can see exactly where the money goes.
4. Closing. The title company wires each payoff, records the releases, and pays you the balance.

Example: You sell for $200,000. You owe $110,000 on the mortgage, $6,000 in back property taxes, and a $4,000 judgment. Closing costs are $5,000. Your proceeds: $200,000 minus $125,000 equals $75,000. These are made-up numbers to show the math.

The cash offer calculator can help you estimate what a cash offer might leave you after payoffs, and compare it to listing.

What types of liens can be on a house?

Most liens fall into a few common types. Each one gets paid from your proceeds, but they come from different places and some are harder to clear than others.

A mechanic's lien secures payment for labor or materials used to improve or repair the property. A judgment lien is created when a court rules that you owe money and the creditor records the judgment against your property.

How do you sell a house with an IRS tax lien?

You have two choices: pay the IRS from your sale proceeds at closing, or ask the IRS to release the lien from this one house with a Certificate of Discharge.

A federal tax lien is the government's legal claim against all of your property, not just the house. The IRS says it releases a lien within 30 days after the tax debt is paid in full. If your sale will pay the whole balance, the title company can usually just pay it at closing.

If the sale will not cover the full tax debt, you can apply for a discharge. A discharge removes the lien from the specific property being sold so the buyer gets clear title. The IRS often still expects to receive whatever proceeds are left after senior debts like your mortgage. Here is the process, according to IRS Publication 783:

1. Fill out Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien.
2. Include the sale price, the amount the IRS can expect to receive, and the title or escrow company handling the closing.
3. Mail it to the address listed in Publication 783.
4. Submit it at least 45 days before closing. The IRS asks for that much time to review and respond.

To find out how much you owe on the lien, Publication 783 lists the IRS phone line 1-800-913-6050. A tax pro or tax attorney can help if your situation is complicated. This is not tax advice.

What happens if you owe back property taxes?

Unpaid property taxes are paid at closing from your proceeds, with penalties and interest added. The real risk is time: if you wait too long, the county can sell the house or a lien on it at a tax sale.

Every state handles this differently. Some sell tax lien certificates to investors. Others sell the house itself at a tax deed sale. Many give owners a "redemption period" to pay everything back and keep or reclaim the home, but the length varies widely.

Example from one state: In Texas, the owner of a residence homestead or agricultural land can redeem within two years after the buyer's deed is recorded, and owners of other property have 180 days. Redeeming costs the tax sale price plus a premium of 25% in the first year or 50% in the second year for homesteads.

Other states are very different. Check your state guide and call your county tax office for a current payoff and any sale date.

In 2023, the U.S. Supreme Court ruled in Tyler v. Hennepin County that a county which sold a home for $40,000 to cover a $15,000 tax debt could not simply keep the extra $25,000. Even so, selling the house yourself before a tax sale almost always leaves you more control and more money than waiting.

What if the liens add up to more than the house is worth?

If you owe more than the house can sell for, the sale cannot close unless the lienholders agree to accept less. This is called being "underwater."

Your options:

• Short sale. Your mortgage lender agrees to take less than the full payoff. Junior lienholders usually must agree too. This takes time and paperwork.
• Negotiate other liens. Judgment creditors and some contractors may settle for less if the alternative is getting little or nothing.
• Bring cash to closing. If the gap is small, you can cover it yourself.
• Talk to a lawyer about bankruptcy. Some liens can be affected in bankruptcy and some cannot. A bankruptcy attorney can tell you which.

If you are also behind on your mortgage, read selling a house facing foreclosure for more options and timing.

Do cash buyers buy houses with liens?

Many cash buyers and investors will buy a house with liens, as long as the numbers work after payoffs. A cash buyer cannot make a lien go away. The title company pays the liens from the purchase price no matter who buys.

What a cash buyer can offer is speed and flexibility. They are not waiting on a lender, so they can close as soon as the title is clear. Some experienced buyers will also work with a title company on lien negotiations or a short sale.

The trade-off: cash buyers usually pay less than a fully repaired house would get on the open market. Many investors use an industry rule of thumb called the "70% rule" (about 70% of the after-repair value minus repairs). If the liens leave little equity, a lower cash price may not cover them. Read how cash home buyers calculate offers before you decide.

You can ask Cash Offer Desk for a written as-is cash offer and get offers from other local buyers too. Cash Offer Desk is free for sellers (how we make money). Tell buyers about every lien you know of up front, so their offers reflect the real payoffs.

How do you prepare to sell a house with liens?

Start by finding out exactly what you owe and to whom. Surprises late in the process are what kill closings.

1. Pull your own records. Search your county recorder's website for liens and judgments under your name and address.
2. Get a preliminary title report as soon as you have a buyer, or earlier if you can.
3. Request payoff statements from your mortgage servicer and any HOA.
4. Call the county tax office for back taxes, penalties and any scheduled tax sale date.
5. Start any IRS discharge application early. Remember the 45-day lead time.
6. Gather documents. See documents needed to sell a house for cash.
7. Talk to a real estate attorney if you have disputed liens, judgments you do not recognize, or more debt than value.

When you know your payoffs, you can tell quickly whether a cash sale, a listing, or a short sale makes the most sense.