Home Equity and Other Assets: When They Block a Hardship Finding

A taxpayer can have no income left after expenses and still be turned down for hardship status. The usual reason is equity. A paid-off house, a truck with no loan, a brokerage account they forgot about. The IRS hardship test looks at assets as well as monthly cash flow, and it is written that way on purpose.

The rule

IRM 5.16.1.2.9, the hardship section of the CNC manual, says hardship cases "Generally... involve no income or assets, no equity in assets or insufficient income to make any payment without causing hardship." Then the sentence that matters: "An account should not be reported as CNC if the taxpayer has income or equity in assets, and enforced collection of the income or assets would not cause hardship."

Notice the last clause. Equity alone does not end the analysis. The question is whether collecting it would cause hardship.

What the IRS asks you to do with equity

IRM 5.15.1.3 lays out the sequence. The employee should:

• Request immediate payment if you have cash or liquid assets equal to the total liability.
• Request full payment if you have equity in assets equal to or more than the liability and can sell the asset "or use it as collateral for a loan without causing a hardship."
• Request partial payment if you have liquid assets or equity "that can be sold or borrowed from to reduce the liability owed by the maximum extent achievable given the taxpayer's circumstance."

IRM 5.15.1.20 adds that if an asset can be liquidated or borrowed against to satisfy or make a substantial payment, the employee should discuss using it "prior to entering other collection alternatives." CNC is one of those alternatives.

How the IRS values assets

IRM 5.15.1.21 sets the valuation vocabulary:

• Fair market value is "the price set between a willing and able buyer and the seller in an arms length transaction with full knowledge of the relevant facts."
• Quick sale value reflects a sale under pressure, "usually 90 days or less." It is "Generally... calculated at 80% of FMV," though a higher or lower percentage may be appropriate.
• Forced sale value reflects a sale by an unwilling seller such as in foreclosure, with FMV reduced by up to 25 percent.
• Reduced forced sale value accounts for redemption rights after an administrative seizure and is generally 60 percent of FMV.

Equity is value minus encumbrances, with attention to the priority of any Notice of Federal Tax Lien against those encumbrances.

A home equity example

A widow in Polk County owns a house with a fair market value of $250,000 and a $160,000 mortgage. Quick sale value at 80 percent is $200,000. Subtract the $160,000 mortgage and her equity is $40,000. If she owes the IRS $30,000, the IRS will want to know whether she can borrow against that equity.

Now add the facts. She lives on Social Security. Her allowable expenses already exceed her income. No lender will give her a home equity loan she can repay, and if one did, the new payment would push her further below basic living expenses.

The IRM addresses exactly this. IRM 5.15.1.31: "Taxpayers will not be required to pursue equity in real property if borrowing on the equity in the property or selling the property will impose an economic hardship." That exception is the core of her hardship case.

The reverse mortgage question

For older homeowners, the IRM raises one more option. IRM 5.15.1.31 notes that "In certain cases, a reverse mortgage may enable a taxpayer to pay the tax liability," and explains that the homeowner retains title, the loan becomes due when the homeowner moves, sells, reaches the end of the loan period, or dies, and the proceeds are loan advances, not income. Expect the question if you are a senior with substantial equity. Whether it makes sense depends on your age, the equity, the costs, and your heirs' plans. Get advice before agreeing to anything.

When CNC and equity coexist

The IRM recognizes that sometimes the IRS cannot reach equity right now but may later. Its own example in IRM 5.16.1.6: taxpayers with equity in their home, already carrying a second mortgage, who "cannot qualify at this time for a third." The second mortgage will be paid in ten months. The account is reported CNC with closing code 27 "with a mandatory follow-up in twelve months" to see whether the IRS can then secure payment through a new loan or an installment agreement.

And IRM 5.16.1.2.9 requires that "If the taxpayer has equity in assets, the reason collection is not being pursued must be documented in the history." CNC with equity is possible. It just needs a documented reason.

Jointly owned property

IRM 5.15.1.22 says equity in jointly held assets is allocated "equally between the owners, unless the joint owners demonstrate their interest in the property is not equally divided." Even if the IRS decides not to enforce its lien on jointly held property, it may still ask the taxpayer to try to borrow against the taxpayer's share of the equity. Whether state property law, such as Florida tenancy by the entireties, affects the IRS's reach is a legal question specific to your facts.

Cars, household goods and other property

• Vehicles. IRM 5.15.1.30 says equity in vehicles, boats and aircraft must be determined and considered as possible loan collateral. Values usually come from publicly available online sources, and you can dispute them with an appraisal from an impartial dealer.
• Household goods. IRM 5.15.1.29 says "The taxpayer's declared value of household goods is usually acceptable unless there are articles of extraordinary value, such as: antiques, artwork, jewelry, or collector's items," and the value is reduced by the statutory levy exemption for furniture and personal effects.
• Cash. IRM 5.15.1.25 includes currency on hand and all bank accounts, "checking, savings, online, mobile and any other accounts," foreign or domestic.
• Digital assets. IRM 5.15.1.26.1 requires digital assets to be valued and considered. Form 433-A asks for them on lines 15a through 15e.
• Tools of a trade. Income-producing assets get a separate analysis under IRM 5.15.1.23 that weighs equity against the income the asset produces.

Disputing a value

The IRS's value is not final. IRM 5.15.1.31 lists acceptable methods for real estate: a recent purchase price or sale contract, recent appraisals, the tax assessment, market comparables, homeowners insurance replacement cost, and an observational visit to view the property's condition. A roof that leaks, a foundation crack, or flood damage lowers value. Photos and contractor estimates prove it.

Transfers will be asked about

Form 433-A (Rev. 6-2026) line 11 asks whether, in the past 10 years, you transferred any assets with a fair market value of more than $10,000 for less than their full value. IRM 5.15.1.24 directs employees to determine "what degree of control the taxpayer has over assets and income in the possession of others," and points to the IRS procedures on fraudulent transfers and nominee and alter ego issues.

If you deeded the house to a child or retitled a car, tell your advisor before you fill out the form. Equity that left your name for less than its value can come back into the analysis.

The takeaway

Do not file a hardship request without first running your own equity analysis at quick sale value. If there is equity, be ready to explain why borrowing against it or selling it would itself cause hardship. If you cannot explain that, the IRS will ask you to use the asset, and hardship status will wait until you have.