Federal · IRS Publication 783Selling a house with an IRS tax lien: how a certificate of discharge works

When a seller owes federal taxes and the IRS has filed a Notice of Federal Tax Lien, the title company usually won't close until the lien is paid or the house is discharged from it. A certificate of discharge under Internal Revenue Code §6325(b) removes the lien from the specific property named in it. The application is Form 14135, explained in IRS Publication 783, and the IRS asks that it be submitted at least 45 days before the date the certificate is needed. The application names the provision that fits: §6325(b)(1) when the taxpayer's other property still subject to the lien is worth at least twice the tax liability plus earlier encumbrances; §6325(b)(2)(A) when the IRS is paid an amount not less than the value of its interest in the property – typically the sale price minus senior liens and settlement costs; §6325(b)(2)(B) when the government's interest has no value because senior debts exceed the property's value or sale price; §6325(b)(3) when the proceeds are held in an approved escrow fund subject to the IRS's claims in their original priority; and §6325(b)(4) when a third-party owner who isn't liable for the tax deposits or bonds the government's interest and then has 120 days to sue in federal district court to challenge the amount. Attachments typically include a disinterested third-party appraisal plus another valuation, the title report, the sales contract and the proposed closing statement. Don't send payment with the application: the IRS Advisory group determines the amount and tells the applicant when to pay, by cash, certified, cashier's or treasurer's check or money order (a personal check delays the certificate until it clears). Under (b)(2)(A), the certificate issues after the IRS receives the agreed payment, proof the taxpayer was divested of title and a copy of the final settlement statement. A denial comes with Form 9423 and appeal rights; a seller selling a principal residence under (b)(2) may request a relocation expense allowance on Form 12451.