Can You Buy a House If You Owe Taxes to the IRS or State?

You’ve always dreamed of owning a home, picturing the day you’d finally be able to put up your own holiday decorations and host backyard barbecues. But there’s one big question looming over your fantasy: can you buy a house if you owe taxes? It’s a valid concern that many potential homeowners share.

The good news is that owing back taxes doesn’t necessarily mean your homeownership dreams are dashed. However, it can definitely complicate the process. Understanding how IRS or state tax debt impacts house-buying and knowing your options are essential first steps toward achieving your goals.

How Tax Debt Can Affect Your Home-Buying Journey

To understand how owing taxes can throw a wrench in your plans, it’s helpful to grasp how mortgages work. When you apply for a mortgage, lenders will assess your financial stability and risk level. Unpaid taxes are major red flags for lenders, potentially leading to the following consequences:

Tax Liens and Levies

If you owe a significant amount in back taxes, the IRS or state government can place a tax lien on your property. This essentially gives them a legal claim to your assets, including any real estate you own, making it difficult to sell or refinance in the future.

In some cases, the authorities may even resort to levies, which allow them to seize assets like wages or bank accounts to settle the debt, further jeopardizing your ability to make mortgage payments.

A Lower Credit Score

Your credit score is a major factor in mortgage approval and interest rates. Unfortunately, unpaid tax debt can drag down your score. A lower credit score translates to fewer loan options, higher interest rates, and potentially even mortgage rejection.

Down Payment Difficulty

Saving for a down payment is already challenging enough, but it can feel almost impossible when you’re also dealing with tax issues and potential collections. Juggling these financial burdens can make it incredibly difficult to accumulate the funds needed for a down payment.

Buying a House with Tax Debt: What Are Your Options?

Navigating the path to homeownership with the weight of tax debt may be daunting, but the good news is that you have options. Let’s explore some of them.

Paying Your Tax Obligations

This is the most straightforward solution but also the most difficult. While paying off your tax debt in full is ideal, it’s often not realistic for individuals or families facing financial hardship.

Setting Up a Payment Plan

Negotiating an installment agreement with the IRS can be a viable alternative to completely resolving your debt before buying a house. Such an agreement allows you to make monthly payments toward your balance over an extended period.

Installment agreements can offer many benefits. Among other things, they can help prevent liens and levies and improve budgeting and financial management. They may also be enough to satisfy some lenders.

Making an Offer in Compromise

An offer in compromise (OIC) allows certain taxpayers to settle their tax liability for less than what they originally owed. This option is generally reserved for individuals and businesses facing significant financial hardship. While potentially life-changing, the OIC process is complex and requires professional guidance.

Negotiating with the Seller

Though less common, directly negotiating with the seller might be possible in specific situations. Seller financing, for example, involves the seller acting as the lender instead of a traditional mortgage company. The seller might be more lenient regarding tax debt. However, this approach is typically more complex and involves considerable legal constraints.

Important Note on State Taxes

Dealing with state tax debt can be just as stymying as owing the IRS, and it can also complicate your path to homeownership. As with federal taxes, you may have options to resolve state tax debt through payment plans or settlement offers.

Contacting your state’s tax authority is a good first step, but setting up these arrangements can be tricky, and the rules vary by location. For trustworthy guidance on resolving both state and federal tax liabilities so you can focus on buying your dream home, contact Tax Relief Counsel today for a free consultation.

The Way Forward: Steps to Take When Buying a House with Tax Debt

Beginning the journey to homeownership while carrying considerable tax debt can feel like entering uncharted territory, but with the right approach, you can increase your chances of success. Here are the key steps to take.

Consult a Tax Attorney

Seeking guidance from a qualified tax attorney focused on tax debt resolution is paramount before making any significant decisions. They can analyze your situation, explain your rights and options, and help you develop a personalized strategy.

Get Your Financial Ducks in a Row

Transparency is key when approaching lenders. Obtaining a current copy of your credit report, gathering necessary financial documents, and preparing a clear overview of your debt obligations will demonstrate your willingness to address the issue and work toward a solution.

Build Your Down Payment

Even with tax debt, showing lenders you have some skin in the game can go a long way. If at all possible, start saving for a down payment. Even a small amount can demonstrate financial responsibility and improve your chances of securing a mortgage.

Shop for Lenders

Not all mortgage lenders have the same criteria when it comes to tax debt. Consider researching and approaching lenders that are known to be more flexible with borrowers who have a history of tax issues.

Don’t Let Tax Worries Derail Your Plans

Buying a house with tax debt can be challenging, but it’s important to remember that it’s not impossible. With careful planning, professional guidance, and a bit of perseverance, you can overcome the obstacles in your path and turn your dreams into a reality.

Schedule a free consultation with our veteran tax attorney, Ramy Shabana, to learn more. We’re here to help you understand your options and guide you on your journey.