Can You do a Short Sale with Federal AND State Tax Liens?

Yes! You can absolutely short sale your home if you have Federal and State tax liens.  Although the process can be a bit more challenging it’s done successfully every day!

Short sales as you know take quite a bit of time to close because you need to get lender approval before you can close escrow. Whereas the traditional or “organic” real estate transaction can take 30-45 days to close, a short sale with one or two liens can take up to 2-3 months to get short sale approval. Throw in a federal and/or state tax lien and it can take an additional 30-45 days before you can close the sale.

Getting the lender to approve your short sale is the first step in the process, getting the state and feds to remove the tax liens from the property is the next step.  You can work on removing the federal tax liens in conjunction with the lender short sale approval process, however if you are in California, you must wait until you have written lender approval and an appraisal before you can get the state tax liens removed.

Because of the varying time constraints between federal and state tax lien release make sure to set expectations with all parties involved.  If you are using a short sale addendum, as is required in California, make sure that you have a long expiration date (boilerplate is 45 days) but when a tax lien is involved make sure you have at least 90-120 days for the short sale addendum expiration date.

Working with short sales and tax liens can seem daunting to many agents but once you’ve been through the process you will know what is required of you…look at it as just one more hurdle you have to jump through in the short sale process.

Your mission when working with a short sale that has a federal or state tax lien is to release the lien(s) from the property so you can close the sale. This means that you need to compile information, submit forms to the appropriate departments, and get the lien released from the property.  Although it seems daunting in reality, with a little patience, perseverance and know how it can be done.

Federal Tax Liens

The first step is to find out what is expected of you and what the time frames are for releasing the federal tax lien.  First read IRS publication 783 entitled “How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien”. Then download IRS form 14135, http://www.irs.gov/pub/irs-pdf/p783.pdf. Both are easy to read and easy to follow with complete instructions.

Not clear enough and need more assistance? Then take a look at the videos that the IRS released to help you through the process. http://www.irsvideos.gov/Individual/IRSLiens/

Other publications that will be useful to you are:  “Guidelines for Notices of Federal Tax Liens”, http://www.irs.gov/pub/irs-pdf/p1468.pdf and Power of Attorney and Declaration of Representative”, http://www.irs.gov/pub/irs-pdf/f2848.pdf

State Tax Liens (California)

With a federal tax lien you can submit the paperwork for release of liens prior to getting the short sale approval from the lender(s).  However, if you are in California and you have state tax liens you must have written short sale approval letters prior to submitting your application for the release of the state tax lien. You also need to submit an appraisal report with your application whether it’s the appraisal from the short sale lender(s) or from the buyer’s lender.

If you don’t have the appraisal you can write a letter indicating that the appraisal report is forthcoming but please note that if you do not submit the appraisal with your application your release of the lien will be contingent upon the State receiving the appraisal. (Caveat: in lieu of the appraisal report you can submit a thorough CMA. Although the guidelines state that an independent appraisal is needed from licensed appraiser there have been instances where the CMA provided is sufficient to garner lien release).

The instructions for “Partial Release of Lien and Subordination of Lien” can be found at the following link, https://www.ftb.ca.gov/individuals/liens/rlslien.shtml

While the Feds have a form for third party authorization (form 2838) the State of California does not give agents authorization to speak on behalf of their clients. A real estate agent can gather all of the supporting documents and submit the application but it is your title officer who will have access to the seller’s file. You will only be able to track the file/package through your escrow officer.

The link for title and escrow instructions is,  https://www.ftb.ca.gov/individuals/liens/title_escrow_companies.shtml

The entire package needs to be sent either via FedEx or UPS (overnight) and once it is received the file will be assigned to a representative who will review the package. Thereafter it will take approximately 21 days to get the release so if your approval letter has a close of escrow date make sure to ask for an extension to allow time for the release of liens.

As I mentioned in the beginning of this article, make sure to set expectations with the Buyer’s Agent, the Buyer’s and your Seller.  Remind them that while you have a few more steps in the process of getting the short sale approved because of the tax liens, it can be done!

Lastly, make sure that you let the Seller know that just because you have removed the tax liens from the property in order to complete the sale their debt to the Stated and Feds is not forgiven. The outstanding federal and state debt still needs to be repaid. For more information about that its best that the Seller contact their CPA and/or start their search with the IRS or Franchise Tax Board.

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Lydia Puller is a Luxury Short Sale Specialist. She is CDPE and CIAS certified Realtor and author who specializes in “strategic” and “hardship” short sales in the San Francisco Bay Area. Lydia’s short sale team covers Marin County, Sonoma County, San Francisco County, Alameda County and Contra Costa County.

To learn more about short sales, go to http://www.LuxuryShortSale.com or http://www.ShortSalesMarinCounty.com. To search all short sale and pre-foreclosure listings visit www.LydiaPuller.com