Can You Buy a Home If You Owe Taxes?
A majority of Americans, 65.8%, owned their own homes in 2022. If you’re hoping to join that statistic soon, then congratulations! You have many things to consider along your journey, including how your past debts could impact your present goals and future plans.
Do you currently owe back taxes to the IRS? Have you been neglecting your tax situation and failing to file returns for the past few years?
When these situations are a part of your financial picture, you’ll need to get some advice before you go out and attempt to buy a home. If you don’t, your tax situation could prove to be a roadblock in your homeownership goals. There are ways to overcome your tax problems in a way that still allows you to meet your goals, though. Learn everything you need to know about owing the IRS and buying a home below.
Can You Buy a House if You Owe Taxes?
The short answer is ‘yes’, you can absolutely purchase a home even if you owe the IRS tax debt. That being said, your pathway to obtaining a home will be more complicated if you’re not in good standing with the federal tax agency. You will struggle to get a mortgage from a traditional lender if you have unpaid taxes.
What’s more, you’ll likely face specific risks if you go ahead with buying a home despite owing the IRS a significant chunk of money. The IRS will be able to discover your newfound homeowner title. When you owe them enough, this new purchase may prompt them to take collection action against you.
Will Back Taxes Prevent You From Getting a Home Loan?
Yes. Applying for a mortgage when you owe taxes will cause a few roadblocks, but it won’t necessarily prevent you from being able to take out a loan.
If you are ignoring your back taxes, most traditional banks won’t work with you. However, if you’re in good standing with the IRS and making payments on your back taxes, banks may consider working with you. In this case, the lender will consider these payments when calculating your debt-to-income ratio. They’ll also want some reassurance that you’re not likely to wrack up more unpaid tax debt.
Alternative lenders might work with you whether you’re in good standing with the IRS or not. But they might also offer less favorable deals and interest rates.
Can You Buy a Home With Unfiled Tax Returns?
Unfiled returns can make it impossible to get a home loan. Lenders use your tax return to verify your income, especially if you’re self-employed or a business owner. Before applying for a mortgage, make sure to catch up on your unfiled returns. Then, make a plan to pay your tax debt. To be on the safe side, talk with a mortgage broker so that you get a sense of the best way to resolve the issue.
Will Your New Property Be At Risk?
It’s possible that your new property could potentially be at risk if you purchase it while neglecting your tax debt. This is especially true if you’ve been completely ignoring the IRS, you’ve attempted to claim you don’t have the money to pay off your tax debts, or you already own other properties.
Here’s why – the IRS has the authority to leverage certain collection efforts against delinquent taxpayers. Among these options are tax levies and tax liens, both of which could be attached to your new property if you don’t communicate with the IRS about your tax situation. Neither of these tax situations is ideal, and one of them could leave your property vulnerable to seizure from the IRS. Keep reading to learn about how each of these collection efforts could put your new home at risk.
How a Tax Levy Could Impact Your Home Purchase
An IRS tax levy is a very serious legal notice that allows the tax agency to officially seize your property in order to settle your tax debt. This type of collection effort won’t pop up out of nowhere, and it shouldn’t come as a surprise to the taxpayer. That’s because you will receive this type of treatment only after:
- Receiving a demand for payment notice from the IRS
- Failing to pay your tax debt
- Getting notified about the potential levy
- Having the opportunity to take action to prevent it from coming to pass.
A tax levy will result in the seizure of your property, so if you get this type of notice, it’s imperative to take action as soon as possible to learn more about your options. A tax levy is not public information, so one good part about this collection effort is that it should not impact the rest of your finances.
Note that the IRS must follow special rules before seizing your primary residence, but if you owe over $5,000, the agency has the right to take your home. If the agency seizes your home, you have a limited amount of time to buy it back, but you must pay interest and penalties on top of the sale price.
How a Tax Lien Could Impact Your Home Purchase
A tax lien is a type of collection effort that’s similar to a levy and puts your property at risk. The main difference, though, is that a levy will lead to the actual seizure of your property, whereas a tax lien is simply a legal claim against your property. In other words, a lien may not actually result in your property’s seizure.
In general, a tax lien alerts everyone else that the government has a legal right to your property. This can prevent you from leveraging your property to get loans or even selling it yourself without giving the government a percentage. A tax lien is a public document, which means it could impact your financial status. Although tax liens don’t appear on your credit report, creditors and lenders will be able to see you have a tax lien against your home when they do a public records search on you.
Can You Have a Tax Lien or Tax Levy Removed From Your Property?
Yes. It is possible to have a tax lien or levy removed from your property if you’re able to get back into good standing with the IRS. That doesn’t necessarily mean you have to pay back all of your back taxes, but it does mean that you’ll need to start to communicate with the tax agency, figure out a plan to pay them back, and possibly submit financial information to the agency to prove your financial situation.
The IRS is obligated to remove a levy when:
- You pay off your entire tax debt.
- The collection period for collecting the tax debt expired prior to the levy being issued.
- You prove to the IRS that releasing the levy will help you pay back your debt.
- You enter into a payment plan with the IRS that stipulates the levy be removed.
- You prove the levy is causing a financial hardship.
Keep in mind that if you have a levy or lien removed from your property, it does not mean that you’re no longer obligated to pay off your debt. If you fail to uphold your side of any arrangement with the IRS, then they can reinstate the levy or lien.
Finding Solutions to Your Tax Problems So You Can Move Forward
When you are struggling with tax debt and want to buy a home, it usually makes the most sense to get on good terms with the IRS before moving forward with your homeownership goals. Getting into good standing with the IRS will benefit you in many ways, including opening up the possibility of better loan terms and ensuring that your new home won’t be at risk.
The best way to resolve your situation would be to pay off your full tax debt in one lump sum payment. If that’s not an option for you, here are a few alternatives you can try:
Request to Make Monthly Payments
The IRS offers several different monthly payment plans to help people get caught up on their back taxes. Some of these plans were part of the IRS Fresh Start Program. This doesn’t refer to a specific payment plan. Instead, it’s a collection of relief options that the IRS brought out several years ago. However, before setting up payments, you’ll need to get current on all your past-due returns.
Ask the IRS for a Hardship Extension
If you need more time to pay off your taxes, then consider requesting a hardship extension by using Form 1127. You’ll need to provide the IRS with specific financial information. In exchange, the IRS will agree to stop collection actions against you (temporarily). Generally, if your account is marked as CNC, you won’t be able to get a mortgage until you resolve the issue.
Consider Offer in Compromise Agreements
An Offer in Compromise is a payment arrangement with the IRS. What makes it different from other plans, though, is that you have the opportunity to pay the IRS less than your overall tax burden based on your current ability to repay your taxes. Depending on your circumstances, you will likely need to pay a big lump sum in exchange for the reduced tax burden, but in some cases, you can make payments for up to 24 months.
Apply for Penalty Abatement
If your tax bill is high because you were hit with a penalty for the first time, then you might be eligible to apply for penalty abatement. You’ll also be eligible for penalty abatement when you made an effort to meet your tax obligations but fell short due to circumstances beyond your control.
FAQs: Back Taxes and Buying a New Home
Do you still have more questions? Get answers to some of the most frequently asked questions about owing back taxes and buying a new home below.
Will a Lender Deny You if You Owe Taxes?
It depends. Some lenders will deny approving you for a loan due to your tax situation, but others may still be willing to work with you. Lenders that do still work with you are likely to charge more interest and have less favorable terms, but it may be worth the risk depending on your specific circumstances. Be sure to weigh out the risks and costs before making a final decision about purchasing your new home.
Can I Get a Conventional Loan If I Owe Back Taxes?
To get a conventional mortgage loan, you usually need to have about 20% down. If you have this amount and you have established a payment plan for your back taxes, you may be able to get the loan. However, if you’re ignoring your back taxes or if the monthly payments would make it hard for you to get a mortgage, most conventional lenders will deny your application.
Does an IRS Payment Plan Affect Your Mortgage?
Having a monthly payment plan with the IRS won’t prevent you from getting a mortgage. However, potential lenders will take those monthly payments into account when determining how much to lend you. Your lenders will also want to ensure that you won’t be incurring any new tax debt. Lenders look closely at all of your current debts and finances before offering you a loan.
How Much Do I Have to Owe in Back Taxes Before the IRS Takes My House?
Under current tax codes, the IRS can only get court approval for a levy on your home when your tax debt is over $5,000.
Can I File as Currently Non-Collectible With the IRS and Still Buy a Home?
When the IRS determines that you genuinely can’t afford to pay back your tax debt due to your financial circumstances, they may decide to label your account as “currently non-collectible” status. This means that the IRS won’t continue to pursue collection actions against you, considering your financial situation.
If you go to purchase a new home, then that won’t necessarily interrupt your CNC status. It could, however, prompt the IRS to start an investigation to ensure that your financial situation hasn’t changed. Additionally, most people who qualify for CNC status don’t qualify for mortgage loans. Generally, you can only get CNC status if you have very limited disposable income, which also means that you won’t be able to afford a mortgage payment.
Will the IRS Re-Open an Old Tax Debt Claim if I Buy a House?
Yes. It is possible that an old tax debt claim may get re-opened if the IRS learns that you purchased a home. This is especially true if you’ve been filed under ‘non-collectible status’ with the IRS or proved financial hardship in the past.
If a case gets reopened, then that doesn’t mean that your property will immediately be at risk. The IRS may continue to allow you to be in good standing if they review your finances and still determine that you’re unable to pay back your debt.
Does the IRS Ever Forgive Tax Debt?
Yes. The statute of limitations for collecting a debt is 10 years. Once that time passes, the debt expires, and the IRS can no longer pursue it. There are situations where this time limit is extended, though, like when you enter into a new payment agreement with the IRS.
Are You Ready to Solve Your Tax Problems?
Do you currently owe the IRS a significant chunk of money in tax debt? Are you not even sure how much you owe or what your status is with the IRS due to failing to file returns for several years?
While you can purchase a home while owing back taxes to the IRS, it might not be your best course of action until you’ve reached an agreement with the tax agency. Otherwise, the IRS might decide to take action against you, putting your brand-new home at risk!
What’s more, you may not even be able to get very far in the process if you need to rely on obtaining a loan to get your house. Most lenders will want to see the past few years of your tax returns to not only verify your income levels but also to prove that you’re in good standing with the IRS.
The good news is that no tax problem is too big to tackle. If you’re ready to solve your tax problems and get on with your life, then our team of tax attorneys can help you come up with a solid plan of action. To learn more, contact us at the W Tax Group today to schedule a free consultation and to learn more about how we can help you overcome your tax problems and make your homeownership dreams a reality!