Can You Sell a House With Back Taxes Owed?

Yes, you can sell a house with back taxes owed. The unpaid property taxes become a lien on the property, and that lien must be satisfied before or at closing. In most cases, the back taxes are paid from the sale proceeds, or the buyer receives a credit for the amount owed. Selling is often the best way to avoid a tax sale and protect your equity.

How Property Tax Liens Affect a Home Sale

When property taxes go unpaid, the county places a lien on the property. This lien gives the government a legal claim to the property until the debt is paid. A tax lien takes priority over most other liens, including mortgages. This means that if the property is sold, the county gets paid first from the proceeds. Because of this priority, title companies will not issue a clear title policy until the lien is released. Therefore, you cannot transfer ownership to a buyer without addressing the back taxes.

In a typical sale, the escrow or closing agent will order a payoff statement from the tax collector. The amount due, including penalties and interest, is deducted from the seller's proceeds at closing. If the sale price is high enough to cover the mortgage and the back taxes, the seller can sell without bringing extra money to the table. If the sale price is insufficient, the seller may need to negotiate with the buyer or bring cash to closing.

Options for Paying Back Taxes When Selling

There are several ways to handle back taxes in a sale:

• Pay from sale proceeds: The most common method. The closing agent pays the tax collector directly from the seller's funds.
• Buyer credit: The buyer agrees to pay the back taxes after closing and receives a credit against the purchase price. This is less common because buyers prefer a clean title.
• Short sale: If the home is worth less than the mortgage plus back taxes, the lender may approve a short sale. The lender agrees to accept less than owed, and the back taxes are paid from the proceeds.
• Payment plan with the county: Some counties allow installment plans for delinquent taxes. If you enter a plan, you may be able to sell while making payments, but the lien remains until paid in full.

According to the Los Angeles County Treasurer and Tax Collector, the most common way to sell a house with property taxes owed is to pay the taxes from the sale proceeds or give the buyer a credit equal to the amount owed (source).

Timeline and Risks of Unpaid Property Taxes

If you do not pay property taxes, the county will eventually initiate a tax sale. The timeline varies by state. In California, for example, residential properties have a five-year redemption period after the taxes become delinquent. After that, the county can sell the property at a public auction. In Illinois, the county may sell the tax lien to a third party at an annual tax sale, and the homeowner has a redemption period to pay the taxes plus interest and penalties (source).

During the redemption period, you can still sell the property and pay the taxes from the proceeds. However, if you wait too long, the county may auction the property, and you could lose your home and any equity. It is crucial to act quickly if you receive notices of impending sale.

Tax Implications of Selling a Home with Back Taxes

When you sell your home, you may owe federal capital gains tax on any profit. However, most homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) if they have owned and used the home as their primary residence for at least two of the five years before the sale. The back taxes paid at closing are not deductible as a selling expense, but they reduce your net proceeds and may affect your capital gain calculation. For more details, see the IRS guidance on tax considerations when selling a home.

If you have a mortgage and the lender forgives debt in a short sale or foreclosure, that forgiven debt may be taxable income. However, there are exceptions, such as the exclusion for qualified principal residence indebtedness discharged before January 1, 2026. Consult a tax professional for your specific situation.

Steps to Sell a House with Back Taxes Owed

1. Contact the tax collector: Get an exact payoff amount, including penalties and interest. Ask about any pending tax sale dates.
2. Determine your equity: Calculate the home's market value minus the mortgage balance and back taxes. If equity is positive, a traditional sale is possible.
3. Hire a real estate agent experienced with tax liens: They can help navigate the process and may be able to negotiate with the county to delay a tax sale.
4. List the property and disclose the tax lien: Be transparent with buyers. The lien will be paid at closing.
5. Work with a title company or attorney: They will coordinate the payoff and ensure clear title transfer.

If you are facing an imminent tax sale, you may need to act faster. Some counties allow you to redeem the property up until the day before the sale by paying all taxes, penalties, and costs. Selling before that deadline can save your equity.

State-Specific Considerations

Property tax laws vary by state. For example:

• California: Tax deed state; county sells the property after five years of delinquency. You can sell before the auction and pay the lien from proceeds (source).
• Illinois: Tax lien state; county sells the lien, and the homeowner has a redemption period. Selling is possible but requires paying the lien or negotiating with the tax buyer (source).
• Wisconsin: You can sell a property with delinquent taxes, but the taxes must be addressed before or during the sale (source).

Always check with your local tax collector or a real estate attorney for rules in your area.

When to Seek Professional Help

If you are behind on property taxes and considering selling, consult a real estate attorney or tax professional. They can help you understand your options, negotiate with the county, and avoid a tax sale. If you are facing foreclosure or a tax auction, seek legal advice immediately. You may also qualify for free legal aid depending on your income and location.