Can You Buy a House if You Owe Taxes?

Buying a new home is a significant milestone. However, it’s not always easy to secure finance, especially if you have back taxes. Is it possible to buy a property with back taxes? The short answer is yes, but the reality is more complicated.

Below, our team explains what you should know about buying a house with overdue taxes.

What Is Tax Debt?

First, let’s be clear on what overdue tax is.

Tax debt is money you owe the Internal Revenue Service (IRS). It can occur for many reasons, but common reasons for tax debt are:

• Filing tax returns late
• Errors in a tax return
• Overlooking taxable income
• Lack of funds to pay taxes

It doesn’t matter if you simply forgot to file your taxes or if you made a calculation error. Any issue with a tax return can lead to overdue taxes.

There are two types of tax arrears: tax debt and tax liens. The type of tax issue you have determines how easy it will be to buy a home.

Tax Debt

Tax debt is the outstanding money you owe the IRS. Meaning, it’s money you must pay before you can be up-to-date on your taxes.

Typically, the IRS must collect this sum within 10 years, or else they have no choice but to let the debt go. This is because, eventually, the tax debt “expires” under a law known as the statute of limitations.

Tax Lien

A tax lien is a claim the government makes over your property after you don’t pay tax debt. Essentially, if there’s a lien and you don’t pay your tax debt, the government can seize your property.

Consequences of Back Taxes

Tax issues can significantly impact your life. While every situation is unique, the consequences of unpaid taxes include: 

• Difficulty selling your house if there’s a lien over it
• A lower credit score
• Penalties and interest, which could mean you owe more tax overall
• The stress and anxiety of dealing with mounting debt

And, as we’ll discuss, unpaid taxes can affect your ability to buy a home or secure a home loan.

Can You Buy a Home if You Owe Taxes?

The short answer is yes. Back taxes owed do not stop you from buying a new home. This is the case whether it’s state or federal-level taxes you owe. 

However, the more nuanced answer depends on whether it’s a tax debt or a tax lien.

Can I Buy a Home if I Have Tax Debt?

Typically, yes. However, if you have tax debt, chances are you don’t have the cash to buy a new property outright. This means you’ll need financing to secure your new property.

Any debt, including tax debt, affects your credit score. Lenders look at your credit score, and your debt-to-income ratio, to decide whether to lend. If you have tax debt, you may appear “high risk.” This could make it harder to buy a home. 

You must also consider the costs of actually closing on a home. From legal fees to insurance, buying a home is expensive. Be honest about whether you can afford to move or if it may lead to further hardship. 

Can I Buy a House if I Have a Tax Lien?

Tax liens make it even more challenging to buy a house. Not only does the lien impact your credit score, but it attaches to any new property. You may struggle to get home insurance, or a loan, over a home with a lien attached.

What’s more, the buyer of your existing property may require you to settle the lien before they complete the sale. So, a tax lien makes it hard to buy or sell a house.

Do Back Taxes Affect Mortgage Approvals?

Yes. As tax debt affects your credit score, lenders may refuse to offer a home loan. Or you may not have access to the most affordable or competitive rates.

Can you avoid telling lenders about back taxes? No, as they will appear in regular credit searches. It’s best to be upfront so that lenders understand the situation in advance. 

Tax liens are more concerning for creditors. This is because they won’t be “first” to have the debt repaid if you go on to sell the new home. Instead, the government will receive what they’re owed first.

Our tax professionals can help you understand the impact back taxes have on buying a home in more detail.

What if I Want to Refinance My Home?

Refinancing your home if there’s tax debt can be complicated. This is because lenders will consider your credit rating before agreeing to offer refinancing.

If there’s a lien over the property, you may need to pay this off before refinancing is possible. A tax professional can help you understand your legal options in this scenario.

Can I Buy a Home if I Owe Back Taxes?

Tax debt won’t automatically stop you from buying a house. However, it will make it harder to get a home loan. And if there’s an IRS tax lien, it’s even more challenging to get finance, especially if it’s attached to your property. 

That being said, here’s how you might improve your chances of buying a house while you have tax debt.

• Get your tax record. Check how much you owe so you know exactly what must be paid.
• Check your credit score. This helps you determine what loans you might qualify for. It also shows you how the tax debt is affecting your credit rating.
• Arrange a payment plan. Show that you take the tax debt seriously and you want to meet your obligations.
• If you’re selling your home with a lien, disclose this clearly. Early disclosure helps to avoid confusion and delays later in the conveyancing process.
• Hire a tax professional. Tax professionals can help you set up your payment plan, and devise a strategy for buying a home.

Get Tax Debt Support and IRS Representation Now

Do you have tax debt or an IRS tax lien? Innovative Tax Relief can help. No matter where you’re located in the United States, we can help you resolve your tax issues.

We’ll take the time to understand your situation and explain your options for moving forward. Once you’ve decided how to proceed, we can negotiate with the IRS on your behalf.

We’re committed to helping you pay off your tax debt and take back control of your finances. Get the tax relief you deserve – contact us now to arrange a free initial consultation.