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New Process for Release of Estate Tax Liens on Real Estate Sales

Before executors divide and distribute inheritances to the estate’s heirs, they must satisfy the decedent’s debts. The decedent may have accumulated high credit card balances, medical bills, tax obligations, or other debts. If the decedent owned real property included in the estate, the executor may elect to sell real estate to pay down debts and taxes.

Federal Estate Tax Lien
While the probate file is open, a federal estate tax lien is generally placed on the property titles. If a state estate tax applies, the state tax authority files an additional lien. (No state estate tax is present in the states where TrustCounsel practices.) In order for the property to pass title before the estate is settled, the executor must apply to the Internal Revenue Service for discharge of the federal estate tax lien. The IRS typically has granted a discharge within two weeks, but they request applications are submitted 45 days in advance. (Use the Form 4422 Application for Certificate Discharging Property Subject to Estate Tax Lien. Request a probate attorney to review the document in advance to prevent an unintentional error delaying the discharge.)

Previously, the above process was followed when real property in the estate was sold prior to closing the estate. However, the procedures for releasing estate tax liens on real estate sales “changed” in 2016. The IRS quietly decided that an ever-present rule that had not previously been enforced would be actively imposed on and after June 1, 2016.

Property Closing Requirements
The “new” process requires the same form noted above; however, instead of the IRS waiving the lien, they will issue a “conditional commitment.” The commitment allows the facilitation of property closings if they meet specific criteria:

  1. The IRS receives a provisional closing statement
  2. The IRS or the escrow agent receives net sale proceeds (gross sale proceeds minus transfer taxes, brokerage fees, and a few other qualified expenses)

Both of these criteria must be met in order for the IRS to waive the estate tax lien. The IRS will hold sale proceeds (which will accrue interest) until 45 days after the estate tax return is filed. The estate might receive the proceeds sooner upon an auditor’s favorable preliminary review.

Estate administration can be complicated, even for an experienced executor. An executor would likely be unfamiliar with the procedure change described above. Receive an advance copy of our forthcoming North Carolina Estate Administration Guide by signing up for our newsletter. If you are located in another state, contact our probate attorneys. We also handle estates in Florida, New York, and Tennessee, and have legal contacts nationally.

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