Sell a Land Note When You Owe Back Taxes in Texas

If you owe back taxes in Texas — whether federal income taxes, state franchise taxes, or other tax obligations — and you hold a land note that you want to sell, you may be wondering whether your personal tax debt affects your ability to sell the note and receive the proceeds. The situation of selling a land note when you owe back taxes in Texas is different from the scenario of delinquent property taxes on the collateral (which we address in a separate guide). Here, the tax debt is yours, not the borrower's, and the question is whether and how that personal obligation interacts with the note sale process.

The short answer is that you can generally sell your Texas land note even if you owe back taxes. A promissory note is your personal property, and you have the right to sell it — your personal tax debts do not automatically prevent the sale. However, there are important nuances that depend on the type of tax debt, whether a tax lien has been filed, and how the sale proceeds are handled. Federal tax liens, in particular, can create complications that require careful navigation. Understanding these nuances before you initiate the sale process helps you plan effectively and avoid surprises at closing.

This guide addresses the specific situation of a note holder with personal tax obligations who wants to sell their Texas land note. We will cover the different types of tax debt, how federal and state tax liens work, the practical impact on the note sale process, and strategies for managing the situation to achieve the best possible outcome.

Types of Tax Debt and Their Impact on Note Sales

Federal Income Tax Debt

Federal income tax debt is the most common type of personal tax obligation that Texas note holders face. If you owe back taxes to the IRS, the impact on your ability to sell your note depends on whether the IRS has filed a federal tax lien. The IRS has the legal authority to file a Notice of Federal Tax Lien, which creates a lien on all of your property — including personal property like promissory notes. If a federal tax lien has been filed, it attaches to your note and must be addressed before or at the closing of the note sale. If no lien has been filed, your tax debt is a personal obligation that does not directly encumber the note, and the sale can proceed normally.

A federal tax lien is filed by the IRS with the county clerk in the county where you reside (for personal property) and creates a public record that note buyers and title companies can discover during due diligence. If a buyer discovers a federal tax lien during their evaluation of your note, they will want assurance that the lien will be satisfied at closing or that the sale will not be challenged by the IRS. The lien does not prevent the sale — it means the IRS has a claim against the proceeds, and that claim must be addressed as part of the transaction.

Texas Franchise Tax and State Obligations

If your note is held in an LLC or other business entity that owes Texas franchise taxes, the situation involves the entity's tax obligations rather than your personal taxes. An LLC that has not filed its franchise tax reports may be forfeited by the Texas Secretary of State, which limits its ability to conduct business — including selling assets like promissory notes. If your LLC owes franchise taxes, bringing the entity current by filing overdue reports and paying any penalties is a prerequisite for the note sale. Texas does not impose a personal income tax, so individual note holders do not face state income tax liens, but other state obligations (such as child support liens or judgment liens) can affect the note sale in similar ways to federal tax liens.

Property Tax Debt on Other Properties

If you owe property taxes on properties other than the one securing your note, those tax debts generally do not affect the note sale. Property tax liens in Texas attach to the specific property on which the taxes are owed, not to the property owner's other assets. As long as the property securing your note has current taxes (which is the borrower's responsibility), your personal property tax debts on other properties do not create liens on the note or its proceeds. However, if you owe property taxes on the property that secures the note — because you advanced funds to pay the borrower's delinquent taxes and were not reimbursed — that situation involves the note's collateral directly and is addressed in our article on selling a note when property taxes are delinquent in Texas.

Federal Tax Liens and the Note Sale Process

How Federal Tax Liens Attach to Notes

A federal tax lien, once filed, attaches to all of the taxpayer's property and rights to property, including promissory notes. This means the IRS has a legal interest in your note and its proceeds. The lien does not transfer to the buyer when you sell the note — instead, the IRS's interest attaches to the sale proceeds. At closing, the IRS's claim must be satisfied from the proceeds before you receive the remainder. In some cases, the full proceeds may be needed to satisfy the tax lien, leaving you with nothing. In other cases, the lien amount is less than the sale price, and you receive the difference after the lien is paid.

Obtaining a Lien Release or Discharge

To facilitate the note sale, you may need to obtain a lien release or discharge from the IRS. A lien release removes the lien entirely, which happens when the tax debt is paid in full. A discharge of property removes the lien from a specific asset (in this case, the note) without releasing the lien on your other property. The IRS will consider a discharge request if the sale proceeds will be used to pay down the tax debt or if the IRS's interest will be adequately protected. The discharge process involves submitting an application to the IRS with information about the proposed sale, the expected proceeds, and the proposed distribution of funds. The IRS typically responds within 30 days, although the process can take longer.

Working with a tax professional — an enrolled agent, CPA, or tax attorney — to manage the federal tax lien issue is strongly advisable. The tax professional can communicate with the IRS on your behalf, prepare the discharge application if needed, and ensure that the closing proceeds are distributed in a way that satisfies the IRS's requirements while maximizing the amount you retain. The cost of professional tax assistance is a worthwhile investment when a federal tax lien is involved, as improper handling can result in the IRS challenging the sale or asserting claims against the buyer.

Installment Agreements and Offers in Compromise

If you owe back taxes to the IRS and want to sell your note, the sale may provide an opportunity to resolve your tax debt more favorably. If the sale proceeds are sufficient to pay the tax debt in full, you can use the closing to eliminate the obligation entirely. If the proceeds are not sufficient for full payment, you may be able to negotiate an installment agreement with the IRS, using the sale proceeds as a substantial down payment. In some cases, an offer in compromise — a settlement for less than the full amount owed — may be possible, particularly if your financial situation demonstrates an inability to pay the full amount. A tax professional can evaluate your options and help you determine the best strategy for using the note sale proceeds to address your tax obligation.

Practical Impact on the Note Sale Transaction

Disclosure to the Buyer

If a federal tax lien has been filed, the buyer will likely discover it during their due diligence. Being upfront about the lien from the beginning — rather than waiting for the buyer to find it — demonstrates honesty and allows the transaction to be structured properly from the start. Most experienced note buyers are not deterred by a seller's tax lien; they simply need assurance that the lien will be addressed at closing and that the sale will be legally clean. Longhorn Note Buyers, with over $46 million in Texas notes purchased, has experience handling transactions involving seller tax liens and can work with you and your tax professional to structure the closing appropriately.

Proceeds Distribution at Closing

If a federal tax lien is involved, the closing will include a proceeds distribution that satisfies the IRS's claim before distributing the remainder to you. This distribution should be coordinated with the IRS (or your tax professional) to ensure it meets their requirements. In some cases, the closing agent may need to hold funds in escrow until the IRS confirms the lien release or provides a discharge. The logistics add some complexity to the closing, but they do not prevent the sale from happening. An experienced buyer and a competent closing agent can manage these logistics smoothly.

Impact on Note Pricing

Your personal tax debt should not affect the price a buyer offers for your note. The note's value is determined by its financial characteristics — the remaining balance, interest rate, payment history, property value, and documentation quality — not by the seller's personal financial situation. The buyer is purchasing the right to receive the borrower's future payments, and that right's value does not change because the seller owes taxes. The tax lien affects the distribution of proceeds, not the purchase price. A buyer who attempts to reduce their offer because of your tax situation is not evaluating the note fairly. Getting quotes from reputable buyers ensures you receive a price that reflects the note's actual market value, independent of your personal tax obligations.

When Selling the Note Can Help Resolve Your Tax Debt

Converting an Illiquid Asset to Pay Taxes

One of the most compelling reasons to sell a land note when you owe back taxes in Texas is that the note sale converts an illiquid asset into cash that can be used to address the tax obligation. A promissory note, while valuable, cannot be used to pay taxes directly — the IRS wants cash, not a stream of future payments. Selling the note provides the cash needed to satisfy the lien, stop the accrual of penalties and interest, and resolve the tax issue definitively. For note holders whose primary asset is a land note and whose primary obligation is a tax debt, the note sale is often the most efficient path to resolution.

Reducing Penalties and Interest

Federal tax debt accrues penalties and interest continuously. The longer the debt remains unpaid, the larger it grows. By selling your note and using the proceeds to pay the tax debt, you stop the bleeding — no more penalties, no more interest, and no more stress from an unresolved IRS obligation. The cost of the note sale discount may be offset, in whole or in part, by the penalties and interest you avoid by paying the debt sooner rather than later. If your tax debt has been growing for years and the penalties and interest represent a significant portion of the total balance, the financial case for selling the note to pay the taxes can be compelling.

Fresh Start After Resolution

Resolving a tax debt through a note sale provides a fresh start. Once the IRS obligation is satisfied and the lien is released, your credit is improved, your financial picture is simplified, and you are free from the ongoing stress and legal risk of an unresolved tax debt. For many note holders who have been carrying both a note and a tax debt, the relief of resolving both — selling the note and paying the taxes — is profound. The transaction converts a complicated, stressful financial situation into a clean slate. For more on how the note selling process works and what to expect, our guide on how to sell your land note in Texas covers the complete process.

Steps to Take If You Owe Back Taxes and Want to Sell Your Note

Determine the Exact Tax Situation

Start by understanding exactly what you owe, to whom, and whether any liens have been filed. For federal taxes, you can request a transcript from the IRS that shows your account balance, penalties, and interest. For state obligations, check with the Texas Comptroller's office. For any other tax debts, obtain statements from the relevant taxing authority. Knowing the exact amount owed and the lien status gives you the information needed to plan the note sale and proceeds distribution.

Consult a Tax Professional

Before initiating the note sale, consult with a tax professional who can advise you on the impact of the sale on your tax situation, the process for obtaining a lien release or discharge if needed, and the optimal strategy for using the proceeds to resolve your debt. The tax professional's guidance ensures that the transaction is structured in a way that satisfies the IRS and maximizes your benefit. The cost of this consultation is an investment in doing the transaction correctly and avoiding costly mistakes.

Get a Quote on Your Note

Contact a reputable Texas note buyer to get a quote on your note. Longhorn Note Buyers provides free, no-obligation quotes within 24 hours. Knowing the note's market value gives you a concrete number to work with when planning how to address your tax debt. You can compare the expected sale proceeds against the tax balance to determine whether the sale will fully resolve the debt, partially resolve it, or provide funds for an installment agreement or offer in compromise.

Coordinate the Closing

Once you have a quote, a tax strategy, and any necessary IRS approvals, coordinate the closing to ensure the proceeds are distributed correctly. The closing agent, the note buyer, and your tax professional should all be aligned on the proceeds distribution before the closing date. With proper coordination, the closing can satisfy the IRS lien, deliver your remaining proceeds, and complete the note transfer in a single, efficient transaction.

Ready to Sell Your Note?

If you owe back taxes and want to sell your Texas land note to address the obligation, Longhorn Note Buyers can help you navigate the process. With over $46 million in Texas notes purchased since 2007, a 100 percent close rate on every deal quoted, and experience handling transactions involving tax liens, Longhorn provides the expertise and professionalism you need in a sensitive financial situation. Founded by Nick McFadin — buying notes since 1983 — and partnered with Sandy McFadin since 2013, Longhorn Note Buyers is based in San Antonio and works exclusively in Texas. Call (210) 828-3573 or visit longhornnotebuyers.com today for a free, no-obligation quote within 24 hours. Your note may be the key to resolving your tax debt and achieving the fresh start you deserve.

Frequently Asked Questions

Can the IRS take my land note to satisfy a tax debt?

The IRS has the legal authority to levy (seize) your property to satisfy a tax debt, and this includes promissory notes. However, the IRS typically pursues levy actions only after multiple notices and demands for payment have been ignored. Before the IRS would seize a note, they would send a series of notices, offer you the opportunity to resolve the debt through payment or an installment agreement, and provide notice of their intent to levy. Selling the note proactively and using the proceeds to pay the tax debt avoids the levy process entirely and gives you control over the transaction rather than having the IRS force a potentially less favorable outcome.

Will the note buyer pay the IRS directly from the sale proceeds?

The structure of the proceeds distribution depends on the specific arrangement and the requirements of the IRS. In some cases, the closing agent may be directed to send a portion of the proceeds directly to the IRS to satisfy the lien. In other cases, the full proceeds may go to you or your attorney, who then remits the IRS payment. The specific arrangement should be coordinated with your tax professional and the IRS to ensure compliance with their requirements. An experienced note buyer will work with your professional team to accommodate whatever distribution structure is needed.

Does my tax debt affect the price the buyer offers for my note?

No. The note's price is determined by its financial characteristics — the remaining balance, interest rate, payment history, property value, and documentation — not by the seller's personal financial situation. Your tax debt affects the distribution of proceeds (how much goes to the IRS versus how much you keep) but should not affect the total purchase price. A reputable buyer evaluates the note on its own merits and offers a price that reflects its market value regardless of the seller's personal circumstances.

What if the note sale proceeds are not enough to pay my full tax debt?

If the proceeds do not fully cover your tax debt, you still benefit by reducing the balance and demonstrating good faith to the IRS. A substantial payment from the note sale can serve as the basis for negotiating an installment agreement on the remaining balance or potentially an offer in compromise. The IRS is generally more willing to work with taxpayers who are making genuine efforts to resolve their debt. Your tax professional can advise on the best strategy for addressing the remaining balance after the note sale proceeds have been applied.

How long does it take to get an IRS lien discharge for the note sale?

The IRS typically processes discharge applications within 30 days, although the timeline can vary depending on the complexity of the case and the IRS's current workload. In some cases, expedited processing may be available. Filing the discharge application early in the note sale process — ideally as soon as you have a firm offer from a buyer — minimizes the impact on the closing timeline. Your tax professional can monitor the application's progress and communicate with the IRS to facilitate timely processing.