Home | Tax Liens and Real Estate: How a Certificate of Subordination Comes into Play

Tax Liens and Real Estate: How a Certificate of Subordination Comes into Play

Sep 18, 2023

In our last blog, we covered tax liens recorded against real estate and how a Certificate of Discharge of Property from Federal Tax Lien can help address past-due tax debts owed. Another option concerning tax liens and using real estate to address a past-due tax debt is to consider a Certificate of Subordination of Federal Tax Lien.

At the time of this blog’s writing, the Internal Revenue Service is preparing to increase the current interest rate on underpaid tax debts from 7.0% to 8.0%, effective October 1, 2023. At this point, any taxpayer with a past-due income or employment tax debt owed to the IRS is facing credit-card level interest assessments, meaning the debt will increase faster than it has in decades. It is in the taxpayer’s best interest to get creative when leveraging the application of the money they have available. One way is to consider tapping equity in real estate; the Certificate of Subordination of Federal Tax Lien can provide a tool to help this pursuit of resolution.

What is a Certificate of Subordination of Federal Tax Lien? Simply put, a Certificate of Subordination allows a creditor to move their lien position ahead of the Internal Revenue Service. This will enable taxpayers to retain ownership of their real estate so long as they can find a lender that will consider a loan despite a Federal Tax Lien being recorded against the taxpayer.

Sometimes, it is easier to ingest this type of information by using an example. Let’s use the hypothetical situation of Daniel and Sarah Berg, who are in their 60s and have lived in their home for the last 35 years. The property is valued at approximately $300,000, and they have no mortgage. Daniel has been self-employed for the last ten years, and despite his best attempts to remain compliant with his Estimated Income Tax each year, he has accrued a past-due income tax debt of $450,000. The IRS secured these debts through the filing of Federal Tax Liens through the local County Clerk’s Office. A Revenue Officer was recently assigned to their case, and she has been pressing Daniel and Sarah to address the past-due income taxes owed as quickly as possible.

Daniel and Sarah hire a tax debt resolution professional to represent their best interests before the IRS and deal directly with the Revenue Officer. After learning that Sarah did not want to move, this tax professional reviewed their financial condition and suggested they seek a loan to tap the equity in the real estate. A lender was found who would conditionally loan Daniel and Sarah $180,000 at a 6.5% interest rate IF the IRS would take a secondary lien position. This is when a Certificate of Subordination of Federal Tax Lien comes into place.

The Certificate of Subordination would allow for the following:

  • The IRS to receive a lump-sum payment towards the past-due income taxes,
  • Daniel and Sarah would be able to deduct the mortgage interest paid for the loan on their annual income tax returns,
  • Daniel and Sarah are being charged a lower interest rate on the funds accessed to pay the debt from the loan,
  • The monthly payment of the mortgage would be an “allowable expense” when evaluating the monthly repayment capabilities towards the balance of the taxes owed, and
  • Most importantly, Daniel and Sarah would be able to remain in their home.

Submitting and negotiating a Certificate of Subordination of Federal Tax Lien involves working with the lender, the Revenue Officer, and the IRS Advisory Group to ensure the request is handled correctly with each creditor in their proper lien position. Though the loan secured for Daniel and Sarah only addressed part of the past-due taxes owed, their actions would prevent the IRS from taking aggressive collection actions such as seizing the home. It would also lay the groundwork for the IRS to consider an Installment Agreement or Offer in Compromise to address the balance of the past-due taxes owed.

If you or your client are in a tax debt situation and believe refinancing a piece of real estate will be the best answer, reach out to the team at Golden Lion Tax Solutions. With over two decades of direct and successful experience handling Federal and State Tax Liens and real estate transactions, we know how to identify the best options available and navigate the process in the fastest and most amicable manner possible.


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For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.