Tax Clearance Letter

A tax clearance letter is one of those items that people aren't necessarily thinking about when they start the checklist process with a lender. But essentially, it's going to be certification from the IRS or the state taxing agency. It will vary state to state, of course, and it also goes by different names.

So you might hear things like tax clearance letter, certificate of tax clearance, or even certificate of good standing. In those situations, the seller is requesting from those agencies evidence that they've actually paid up all of their taxes so that the liabilities aren't going to transfer over to the buyer after the acquisition. Now, state by state, it can take differing amounts of time.

So whenever we get on a call and I'm talking with counsel, I say, listen, you have to make sure that the seller is reaching out to the taxing authority as early as possible. Because if they don't, some of these states have lag times of 14, 21, even more days in order to get this tax clearance. Now, depending on your lender, there are differing views at what has to be received prior to closing.

And in most instances, this could actually hold up your closing process. There are ways for a lender to protect itself in the event that the tax clearance letter is available directly at closing, such as holdback escrows from seller's proceeds, etc. But ideally, the seller is getting this really, really early in the process so that the process towards closing is much smoother and you don't have to deal with any post-closing holdbacks or disbursements that would otherwise complicate the scenario.