Discharge Under IRC 6325(b)(2)(A): Paying the IRS Its Share of the Sale Proceeds

Most people who sell property with an IRS lien on it are in the same spot. They owe the IRS more than the house will net. Paying the lien in full at closing is not possible, and the buyer will not close over a recorded lien.

IRC 6325(b)(2)(A) was written for exactly that problem. It lets the IRS release one property from the lien in exchange for a payment equal to the value of the government's interest in that property. The sale closes. The IRS gets what the property was worth to it. The rest of the debt stays on your account.

What the statute says

Section 6325(b)(2)(A) allows the IRS to issue a certificate of discharge if it is paid, in partial satisfaction of the liability, an amount it determines that is not less than the value of the interest of the United States in the property being discharged. The same subsection tells the IRS how to think about that value: it must consider the value of the property and the liens on it that have priority over the federal tax lien.

In plain English, the IRS gets the equity that its lien actually reaches. Not the full tax debt. Not a penalty for selling. The equity.

Building the number

Publication 783 walks through the math with a simple example, and it is worth understanding line by line because every line is negotiable in its own way. The structure looks like this:

Line	What it is	Where it comes from
Sale price or fair market value	What the property is worth	Appraisal plus a second valuation, and the signed contract
Minus senior encumbrances	Liens ahead of the IRS	Title report and payoff letters
Minus allowable selling costs	Commission, title fees, documentary stamps, prorated taxes	Proposed closing statement
Equals the IRS interest	The payment required for discharge	Advisory determination

In the Publication 783 illustration, a property sells for $215,000, senior encumbrances total $135,000, and proposed settlement costs are $15,000. The IRS interest is $65,000. The IRS receives that $65,000, applies it to the debt, issues the discharge, and the remaining balance stays due. That is the whole concept in four lines.

Line one: value

The IRS does not take your word for what the property is worth, and it does not automatically accept the contract price. Form 14135 requires a professional appraisal by a disinterested third party plus at least one additional valuation, such as the county assessed value. The IRS compares those numbers to the contract.

If the contract price is close to the appraisal, this line rarely causes trouble. If the contract price is well below the appraisal, expect questions. The IRS will want to know why you are selling for less than the property is worth, and a sale to a friend or relative at a discount gets particular attention. If the property needs a new roof after the last hurricane season, document it. Repair estimates and inspection reports explain a lower price better than any argument can.

Line two: what counts as senior

A lien is senior to the IRS if it was perfected before the Notice of Federal Tax Lien was filed, or if a statute gives it priority anyway. Your first mortgage recorded years ago is senior. Real property taxes and qualifying special assessments are protected by IRC 6323(b)(6) even when they arise later.

Watch out for home equity lines of credit. Publication 784, which deals with subordination, points out that advances made on a HELOC after the 45-day window following the lien filing are generally junior to the IRS. Your HELOC balance may not be fully senior. The payoff letter does not tell you that; the draw history does.

Junior liens, such as a judgment recorded after the IRS notice, do not reduce the IRS interest. They get paid, if at all, after the IRS.

Line three: selling costs

The IRS allows the ordinary costs of selling: a reasonable real estate commission, title charges, recording fees, documentary stamp taxes, and prorations. These must appear on the proposed closing statement you submit with Form 14135.

What the IRS does not allow is anything that looks like a payment to you dressed up as a closing cost. Moving money to a seller-side entity, paying off an unsecured personal debt from proceeds, or adding a consulting fee nobody can explain will get struck. If you are selling your principal residence and cannot afford to relocate, Publication 783 notes that you may be able to request a relocation expense allowance by filing Form 12451 with the discharge application. It is subject to limits, but it exists.

The process from application to certificate

1. File Form 14135 with the attachments, checking the 6325(b)(2)(A) box in Section 7 and entering the expected payment in Section 6.
2. Advisory reviews. Staff verify the valuation, the senior liens, and the costs, and they may contact the title company, the lender, or the buyer.
3. Conditional commitment letter. If approved, the Advisory Group Manager issues a letter stating the amount and the conditions.
4. Closing. The title company pays the IRS the stated amount by certified funds, cashier's check, or another method Publication 783 accepts.
5. Certificate issues. Under Publication 783, the IRS issues the certificate after it receives payment, proof that you were divested of title, and a copy of the final settlement statement.

The timeline matters. The IRS asks for the application at least 45 days before you need the certificate. Read the Form 14135 guide before you fill out a single box.

When you disagree with the number

Sometimes Advisory comes back with a higher number than you expected. Maybe it rejected the appraisal or disallowed a cost. You have options.

First, talk to the Advisory employee. Many disagreements are about missing documentation, and a corrected payoff letter or a contractor estimate fixes them. Second, if the application is denied, Publication 783 says you will receive Form 9423 and Publication 1660 explaining Collection Appeal Program rights. Third, if the dispute is about who is entitled to the money rather than how much, the sale can sometimes close with the disputed amount held in escrow under IRC 6325(b)(3). That route is covered in the escrow discharge guide.

Third-party owners need to read Section 16

Sometimes the person selling the property is not the person who owes the tax. A property may be titled to a relative, or the IRS may claim a lien against a former owner's interest. If you own the property but are not the taxpayer, Form 14135 Section 16 asks you to choose.

You can waive and proceed under 6325(b)(2), in which case your payment is simply applied to the taxpayer's debt. Or you can decline to waive, and the IRS will treat the application under IRC 6325(b)(4) as a deposit. That preserves your right under IRC 7426(a)(4) to sue in federal district court over the IRS valuation, and Publication 783 states that the court action must be filed within 120 days. Third-party owners should make that decision with eyes open.

What happens to the rest of the debt

After the discharge, the remaining balance is still owed. The lien still attaches to everything else you own. The ten-year collection period under IRC 6502 keeps running, as explained in the guide to the IRS collection statute.

The sale may also change your options. With the house gone, your equity in assets drops, which matters for an offer in compromise or a payment plan. Plan the next step before you close, not after.

The IRS gets its share of this property. Not your future. Make sure the paperwork says exactly that.