Liens on a house: how liens, title and taxes work when you sell

What liens on a house are

A lien gives a creditor a legal interest in your property until a debt is paid. Some liens are voluntary: you agreed to them when you took out a mortgage or a home equity line of credit. Others are involuntary: they're attached by law or a court when a debt goes unpaid, such as unpaid property taxes, a court judgment or a contractor's bill.

Liens on a house stay with the property, not just the person. That's why a title company searches for them before closing and requires them to be paid or released, so the buyer receives the property free of the old debts.

Liens on a house can also affect you before you sell. They can block a refinance, make it harder to get a home equity loan, and in some cases allow the creditor to ask a court to force a sale. Knowing what is recorded against your property, and why, is the first step in deciding how to sell.

Common types of liens on a house

Each type of lien comes from a different law and creditor, so each has its own payoff and release process. Property tax liens generally take priority over most other liens, which is why unpaid property taxes are usually paid first at closing.

Among the others, priority generally follows the order in which liens on a house were recorded, with exceptions set by state and federal law. Priority matters most when there isn't enough equity to pay everyone: the first-priority lienholder is paid first, and later lienholders may have to agree to accept less for the sale to close.

• Mortgage and home equity loans or lines of credit
• Property tax liens for unpaid real estate taxes
• Federal or state tax liens for unpaid income or other taxes
• Judgment liens from a lawsuit a creditor won
• Mechanic's liens from unpaid contractors or suppliers
• HOA or condo association liens for unpaid dues or assessments
• Municipal liens for code fines, utilities or demolition costs
• Child support liens, where state law allows them

How to find liens on a house

Liens are usually recorded in the county where the property is, often with the county recorder, clerk or register of deeds, and many counties offer an online search by owner name or address. Property tax status is available from the county treasurer or tax collector. These searches are a useful start, but they can miss items or show liens that have been paid but never released.

The reliable answer comes from a title search ordered for the sale. The title company reviews the recorded history of the property and lists every lien and other issue it finds as a requirement to be cleared before closing. Ordering it early gives you time to resolve surprises.

If you suspect liens on a house you've inherited or haven't managed closely, such as a vacant property or a rental, look sooner rather than later. Unpaid utility bills, code fines and association dues can become liens without the owner noticing, and they keep growing with interest and penalties.

How liens on a house are paid when you sell

In most sales, liens on a house are paid from the proceeds at closing. The title or closing company requests a written payoff statement from each lienholder, showing the amount due through the closing date, including interest and fees. At closing, it pays each one, records the releases, and sends you what's left after the payoffs and your closing costs.

Payoff amounts change with interest and penalties, so old statements aren't reliable. Ask the closing company to request current figures, and review each line on the settlement statement before you sign.

When liens on a house add up to more than it's worth

If the mortgage and other liens exceed what the house can sell for, a normal sale won't cover everything. Options include bringing cash to closing, negotiating with lienholders to accept less, or, for mortgages, asking the lender to approve a short sale. Judgment creditors and some other lienholders will sometimes accept a reduced payoff to be paid now rather than wait, but any agreement must be in writing before closing.

For a federal tax lien, the IRS has a process for releasing or discharging a lien from a specific property so a sale can close; its guidance on understanding a federal tax lien explains the options. A real estate attorney or tax professional can help you approach the right creditor.

Disputed, old or mistaken liens

Not all recorded liens on a house are still owed. A loan may have been paid off without a release being recorded, a judgment may have expired under state law, or a lien may belong to someone with a similar name. The fix might be a recorded release from the creditor, proof of payment, or, for a contractor's lien, a bond or court process under your state's rules. Some title problems need a court action, such as a quiet title suit, to resolve.

Disputed liens on a house take the longest to resolve, so start early and keep documents: canceled checks, payoff letters, court records and correspondence. A real estate attorney can tell you which route applies.

Other title issues besides liens on a house

Title problems aren't always debts. A deceased owner still on the deed, an heir who hasn't signed, a divorce that didn't transfer the house, a mistake in the legal description, a boundary encroachment or an unrecorded deed can all hold up a sale. The title search will flag most of these. Probate documents, a corrected deed, an affidavit or a court order may be required, and the title company will tell you what it needs to insure the buyer.

Property taxes, income taxes and disclosure

Property taxes and income taxes are separate questions. Property taxes for the current year are usually prorated between you and the buyer at closing, and any past-due amounts are paid from the proceeds. Income tax on the sale is a matter for your own return: if the house was your main home, IRS Topic 701 and Publication 523 explain the gain exclusion. The closing company may issue a Form 1099-S, but it doesn't give tax advice; a tax professional does.

Disclosure rules also still apply. Most states require sellers to disclose known material defects, and some issues, such as pending assessments, should be disclosed too. Selling as-is doesn't remove those duties.

Keep the two kinds of tax separate in your planning. Paying off a property tax lien at closing settles what you owe the county; it doesn't answer whether the sale creates income tax, and a federal or state tax lien is a separate debt again. Bring each question to the right place: the closing company for payoffs, the taxing authority for current balances, and a tax professional for your return.

When a direct sale helps

Liens on a house don't usually prevent a sale, but they can slow a traditional one: a financed buyer's lender wants clear title on its schedule, and a long list of payoffs can push a closing past the buyer's rate lock. A direct cash buyer who is used to title work can wait while liens are resolved and close on the date that works once the title is clear. If the house is in good condition and the liens are simple, listing may still net more, so compare both.

Selling a house with liens to Prominent

Prominent Cash Offer buys houses directly, as-is, in any condition, including houses with liens, back taxes or title issues to work through. You share the address; if the property is a fit, you receive a written cash offer with the amount and terms spelled out. There are no fees or commissions, we pay the closing costs, and you choose the closing date. Liens are paid through the title company from the sale proceeds at closing, and there's no obligation to accept.