How to Refinance with a Tax Lien

So, you want to refinance with a tax lien. The only problem is that the IRS has filed a tax lien against the property. There are ways you can accomplish this if you know what steps to take.

Normally you have a first mortgage company and maybe a second or third mortgage holder who all want to be paid back. All those companies are due to be paid back according to their priority or place in line. The first mortgage (primary) holder has the first rights to any proceeds, the second mortgage company is next, and so on. The IRS is waiting in line behind all the prior mortgage holders.

The problem with this situation comes when you want to refinance the mortgage. The idea behind refinancing is to pay off the old mortgage holders with the new mortgage. This is usually done at a lower interest rate, so you end up with the same amount of debt financed but at a lower rate. Since the IRS is still in line, paying off the old mortgage companies moves them to the head of the line, before any new mortgage company.

Mortgage companies don’t like this because they will fall in line behind the IRS. The reason is that if the IRS were to foreclose on your property, the mortgage company that is now at the back of the line behind the IRS, could end up with nothing after satisfying the IRS lien. They will hesitate writing mortgages if they don’t have first priority status on the loan. In this case they will usually decline your refinance application.

What can you do?

What you want is for the IRS to agree to keep its place at the back of the line (subordinate) so that the primary mortgage holder gets the first priority. You will need to ask the IRS to grant you a Certificate of Subordination.

The IRS will usually agree to this as long as they get paid a share of the proceeds at closing. Here’s an example of how this could work:

Your home is worth $220,000 and you want to refinance from a 7.5% interest rate to a 5.25% rate. Doing the refinance would make your monthly mortgage payment about $325 less than your current payment — so it is a good idea to do it. Say you have $50,000 in equity built up in your home and you have a tax lien of $55,000. Now things get complicated.

The IRS will agree to a subordination if they are paid off their share at closing. They will want the full $50,000 in equity and will subordinate the remaining $5,000.

You win in several ways. First, your tax liability is reduced to $5,000 and you will be saving the higher IRS interest on the $50,000 you paid off. Second, you’re paying a much lower interest rate on your mortgage which means you will have an extra $325 a month to pay off the remaining $5,000 back tax debt more quickly, saving interest there as well.

In some cases you may be able to consolidate all your debt into one new mortgage and use your equity to pay off the IRS completely and extend your mortgage payments out for 15 or 30 years. The IRS wants to be paid off in less than 5 years.

What if I have no Equity?

The IRS may agree to subordinate even if you have little or no equity built up in your home but are stuck with a high interest rate mortgage and by refinancing at a lower interest rate you would have a considerably lower mortgage payment. You can prove to them that with the lower monthly mortgage payments you will be able to pay more each month toward your back tax debt. In this situation you will have a good chance getting them to agree to the plan.

Tax Champions is experienced in negotiating Certificates of Subordination with the IRS. We’ve been saving our clients the difficult work of securing settlements with the IRS to clear the way for your mortgage refinance. We offer a free consultation for you to understand the options that you have available. Call us today at 800.518.8964 to speak with one of our tax professionals.

Make sure that you don’t talk to just any tax professional. If you want someone that can work on your behalf legally then you need an Enrolled Agent with the IRS. If you would like to speak to an Enrolled Agent free of charge before making any decisions about your tax related issues, then please call the Tax Champions main line and ask for tax help. We can be reached Monday through Friday from 9:00 a.m. to 6:00 p.m. PST at 800.518.8964.

Alternatively, reach us by filling out the contact form on this page. One of our customer service representatives will refer you to an Enrolled Agent for counseling completely free of charge.