Tax Lien Subordination: How to Refinance Your Mortgage with Tax Debt

In 2026, mortgage rates have fluctuated, and many homeowners are looking to refinance to lower their monthly payments or pull out equity to consolidate debt. However, if an IRS tax lien is attached to your property, your lender will likely hit the "pause" button immediately.

Most banks will not issue a mortgage unless the borrower is in "First Position." A federal tax lien automatically takes priority over new loans, effectively blocking your refinance. The solution? IRS Tax Lien Subordination.

1. What is Subordination? (The "Cut in Line" Rule)

Lien subordination does not remove the tax lien. Instead, the IRS voluntarily agrees to move "behind" your new mortgage lender in the priority line. Under Internal Revenue Code § 6325(d), the IRS will allow a bank to take the primary position if it is in the government's best interest.

2. Two Ways to Qualify for Subordination in 2026

The IRS won't move to the back of the line just to be nice. You must apply using Form 14134 and meet one of two specific legal "bases":

Basis 1: The IRS Gets Paid at Closing (§ 6325(d)(1))

If you are doing a "cash-out" refinance, the IRS may agree to subordinate if you pay them an amount equal to the interest they are giving up.

• Example: You refinance and pull out $20,000 in equity. If you hand that $20,000 directly to the IRS at closing, they will subordinate their remaining lien balance to your new mortgage.

Basis 2: It Makes Collection Easier (§ 6325(d)(2))

You can obtain a subordination even if the IRS receives no funds at closing. This is common for "rate-and-term" refinances.

• The Logic: If your new mortgage reduces your monthly payment by $400, the IRS sees that you now have $400 more in "disposable income" to pay toward your tax debt. Because the refinance improves your ability to pay, the IRS will often move to the second position.

3. How to Apply: The Form 14134 Checklist

To be successful in 2026, your application packet must be bulletproof. The IRS Advisory Group is strict about documentation. You will need:

• Completed Form 14134: Clearly stating the "Basis" for your request.
• Copy of the NFTL: Your original Notice of Federal Tax Lien.
• Appraisal: A professional valuation of the home (the IRS needs to know the "forced sale value").
• Title Report: A current report showing all existing encumbrances.
• Letter of Commitment: A letter from your new lender stating they will approve the loan if the IRS is satisfied.

4. Critical Timelines for Homeowners

A common mistake is waiting until the week of closing to mention the tax lien.

• IRS Review Period: It typically takes the IRS 30 to 45 days to process a subordination request.
• The Certificate: If approved, the IRS issues a Certificate of Subordination. This document must be recorded in the same county office where the lien was filed to officially move the bank into first position.

5. Why Banks Prefer Subordination Over Discharge

If you are refinancing, you want a Subordination, not a Discharge. A Discharge removes the lien from the property entirely, which the IRS rarely does unless the debt is paid in full. A Subordination keeps the IRS "on the title" but satisfies the bank's requirement to be first in line for payment.

Stop the Refinance Rejection

If your lender has told you "no" because of a tax lien, they likely just don't know the IRS rules. Our firm specializes in preparing Form 14134 packages that meet the 2026 IRS standards, helping you secure a lower interest rate while managing your tax debt.