Tax Break for Refinancing or Selling Home

A tax lien can be a major roadblock during a property sale or mortgage refinance. The IRS has initiated a program to ease this process, thus helping some homeowners save their homes or otherwise avert financial disaster.

The taxman, formerly the financial hit man of the federal government, is getting involved in measures to help the economy and housing market recover. A new program establishes streamlined procedures for subordinating or discharging federal tax liens.

IRS:  An unlikely source for help

The IRS recently announced a plan that would help distressed homeowners complete a home sale or mortgage refinance. This new program applies to homeowners who've temporarily fallen behind on their taxes as a result of the current economic downturn.

Typically, when a homeowner owes past-due taxes, the IRS will file a Notice of Federal Tax Lien on his property, informing other creditors that the IRS has a legal claim. That claim then has to be repaid when the property is sold or refinanced-which can be problematic if the homeowner owes more in mortgage debt than the property is worth.

The new program will ease this burden by allowing certain tax liens to take a secondary position to mortgage-related liens. In some cases, the tax liens may even be discharged. When announcing the program, IRS Commissioner Doug Shulman indicated that he didn't want his agency to inhibit distressed homeowners from taking steps to improve their finances.

It should be noted that discharge or subordination of a federal tax lien doesn't eliminate the tax liability.

Filing a formal request

Homeowners pursuing a mortgage refinance or loan modification should apply for a certificate of lien subordination. The application procedure is detailed in IRS Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien.

Homeowners who want to sell their properties may request a discharge of the tax lien. Usually, these requests are only approved when the homeowner is selling the property for less than what's owed on the associated mortgage debt. Sometimes, the IRS will also discharge a tax lien if the homeowner has other assets that can be claimed. Instructions for this request are included in IRS Publication 783, Instructions on How to Apply for a Certificate of Discharge of Property from Federal Tax Lien.

Subordination and discharge requests are handled by the IRS' Collection Advisory Group. Homeowners are asked to contact their Collection Advisory Group as soon as the sale or mortgage refinance process begins. Not doing so could delay the completion of the subordination or discharge, which would also hold up the closing of the property sale or refinance. Addresses and contact information for the Collection Advisory Group offices can be found in IRS Publication 4235.

Distressed homeowners who need to refinance or sell will certainly appreciate this new and softer side of the IRS.