How Negative Equity Impacts a Tax Lien

Negative equity in a home simply means the borrower owes more on the mortgage than the home is currently worth. Because the amount owed is greater, the borrower would not be able to pay off the debt by selling the property. When a person owes property taxes to the IRS, a tax lien may be incurred against the property itself, not against the owner. The negative equity problem will not affect the lien unless the owner intends to sell the property. At that point, the lien will likely need to be resolved prior to the sale closing.

Selling with Negative Equity

Selling a home with negative equity will result in a net loss for the borrower. The sum gained through the sale of the property will only partially cover the balance on the mortgage. The remainder of the mortgage may be paid off with cash or refinanced through a new loan or new mortgage. When there is a tax lien on a property, it stays with the property even if the house is sold. Unfortunately, this does not mean a person who owes taxes can simply get out of paying those taxes by selling the property. The owner is typically responsible for paying the amount before the home sale is totally closed. As a result, selling a home with negative equity and a tax lien can require a large amount of cash from the seller at the immediate time of the sale. 

Mortgage Foreclosure with a Tax Lien

Foreclosure is the process whereby the mortgage company reclaims the collateral for the mortgage loan; this collateral is the home itself. If a borrower can no longer afford a mortgage on a property with a tax lien, the mortgage company will likely hold the borrower responsible for the lien sum and other expenses even after the home is foreclosed on. This can be particularly detrimental to a borrower who has lost a house, but there is no easy way to escape the obligations. Tax liens are the most senior type of debt, and mortgages follow just behind them. This means they will be first priority in court even if bankruptcy is declared. These senior debts will need to be repaid before personal loans or even home equity loans, so the court will liquidate assets in sums large enough to repay these loans first. 

Tax Foreclosure due to a Tax Lien

It is possible for the IRS to foreclose on a property if the tax debt becomes too high and goes unpaid. The home is seized and liquidated in order to cover the taxes owed on the property. The remaining sum will go to the mortgage lender. The sum provided to the mortgage lender may only cover a fraction of the total payoff on the loan. In this case, the borrower would owe an even greater sum to the mortgage company after the foreclosure. It can take years of bankruptcy arrangements and other assistance to get a borrower out of a deep debt situation in this case.