Can I Buy Real Estate or Land With Cash in the U.S. if I Owe the IRS Taxes?
When you’re ready to buy a piece of property, your head and heart have aligned on the decision. As you prepare to make an offer, you may suddenly stop short, wondering if you are able to do so. Do you owe back taxes to the Internal Revenue Agency (IRS)? Are you allowed to buy land in the United States if you owe IRS Taxes?
Many U.S. taxpayers wonder what restrictions they might face if they owe back taxes to the IRS. Can you buy a house or property through a bank if you owe IRS taxes? What if you make the purchase in cash, will that help?
The short answer is yes — you can buy land or home if you owe IRS taxes, even if there is a lien on another property, but there are a few things to keep in mind. We’re here to help with a list of things to know about buying land when you owe IRS taxes.
The Big Picture
When you owe the IRS money, it can be more difficult to buy property. Let’s take a closer look at some of the reasons why:
- Lenders Need the Full Story
When you apply for a mortgage to buy property, the lender will investigate your credit history and discover any IRS taxes owed. While many are forgiving of minor blips or blemishes, if you owe significant back taxes, they will likely require a deeper dive into your financials and most likely will require some type of resolution before proceeding.
- Your Record of Cooperation Matters
If a lender sees that you have a plan to pay off your IRS taxes and that you are participating in a payment plan, they are more likely to approve your loan. Full disclosure of your financials and a willingness to pay off your debts will be looked upon favorably by lenders. On the other hand, if your financial history shows that you’ve neglected to pay your tax debt, it might be hard to convince lenders that you are a strong mortgage candidate.
- Applying for a Mortgage Often Uncovers Your Financial History
If you are applying for a Federal Housing Administration (FDA) loan — a home mortgage insured by the government, available with a smaller minimum down payment than many conventional loans — your lender will require a process called “manual underwriting”, through which they will assess your eligibility via strict factors, including an assessment of your debt-to-income ratio.
Because the process of applying for a mortgage lays your financial record bare, it’s important to appear as positive as possible in the eyes of a lender. For example, having an installment plan in place for your outstanding IRS taxes will appear better than if you have simply ignored your tax debt.
What if things are worse than a small amount of taxes owed? What if the IRS has placed a lien or levy on your property? Can you still qualify for a mortgage? Let’s take a closer look.
IRS Tax Liens and Levies
When you owe the IRS money, you will receive a series of notices warning you of your debt. If you fail to respond or are unable to pay your taxes and have not entered into an Offer in Compromise, the government may place a tax lien or a tax levy on your property.
Not only will this make it more challenging to sell your existing property, but you may also have a harder time securing a mortgage for a new property. While tax liens and tax levies are often spoken about in the same breath, they have key differences.
- IRS Tax Lien
When the IRS issues a written lien notice on your property, you have ten days to pay your back taxes, before the lien becomes public record. At this point, the lien would appear on your credit report. If you are selling one property, with plans to buy another, a lien on your original property will deter many buyers, however, you would need to apply for a lien discharge with the IRS in order for the buyer to obtain a clear title. For this reason alone, it is better to negotiate a payment plan or Offer in Compromise settlement with the IRS than allow a lien to be placed on your property.
- IRS Tax Levy
An IRS tax levy is a different measure. Rather than place a financial hold on your property, a levy is a process through which the IRS seizes your property, then sells it to recover your unpaid taxes. A tax levy is often used in more extreme cases, where the IRS feels that you owe more than the value of the property.
While it is still possible to secure a mortgage when you have either an IRS tax lien or tax levy on another property, it will almost certainly be more difficult. Your credit history will subject you to more stringent assessments of your eligibility.
What if I Pay Cash?
Knowing that lenders will be less likely to issue you a mortgage if you have outstanding IRS taxes, or if you worry that the IRS will place a lien on your new property, you may be tempted to look at workaround plans. Some taxpayers wonder if they can buy a property with other funds, without having to worry that the IRS will place a lien on it.
After all, if you owe IRS taxes and have enough money to buy a property, wouldn’t the IRS see this as an opportunity to lay claim to the back taxes they say you owe? Wouldn’t they lien the new property right away? Is there a way to buy the property without the need for a formal lender or alerting the IRS to your plans?
Unfortunately, even if you have enough cash to pay for a property outright, this is not a feasible way to leave the IRS out of the loop. Remember, if you owe enough money to the IRS, they will ask for a personal financial statement, where you’ll need to disclose all your assets. While it might be tempting to leave a property off your asset list, remember that failing to report your assets to the IRS is a felony.
The Clear Way Out
So, if you owe IRS taxes and want to purchase property, how do you make it happen? The clearest way forward is to be upfront with the money you owe and proactive about planning to pay it back. For many U.S. taxpayers, this will mean reaching an agreement with the IRS. When you show that you are acting in good faith, lenders and the IRS are more likely to give you credit.
Importantly, if you reach an Offer in Compromise with the IRS, you will likely owe far less than you would have if you hadn’t reached a negotiated settlement. To reach this kind of agreement, it’s critical to work with an experienced tax firm, that can represent your interests and reach the best solution for you.
At Franskoviak Tax Solutions, we have helped thousands of clients with taxes and tax problems for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, IRS tax deadlines, payroll taxes, IRS tax relief, and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes, and more.
Start with a free consultation—we’re here to help you with an Offer in Compromise or other tax settlements that will allow you to move forward, without the IRS holding you back.