Tax Lien Discharge vs. Tax Lien Subordination

What is the Difference Between a Tax Lien Discharge and a Tax Lien Subordination The exterior of the IRS building

The blanket IRS tax lien applies to all your property once you receive a Notice of Demand for Payment and fail to pay the balance in full. The lien encumbers your home and your personal property, even if you aren’t aware that the lien has taken effect. 

This can cause big problems if you want to sell or refinance your home. There are two potential remedies to this issue—a tax lien discharge or a tax lien subordination. 

IRS Tax Lien Discharge

A discharge is an agreement from the IRS to completely remove the IRS tax lien from one specific piece of your property. The IRS is only going to agree to discharge the lien if one of the following circumstances is present:

  • Your other property subject to the lien is worth at least twice the amount of your tax debt.
  • You pay the IRS an amount equal to the value of the IRS interest being discharged.
  • The lien is worthless because senior liens are greater than the value of the property (i.e. an underwater mortgage)
  • You get a lien discharge to sell the property and agree to hold the sales proceeds in escrow and still subject to the IRS tax lien

If you want to sell property subject to the lien, a discharge is going to be your only option. A potential buyer will not purchase property if it is subject to a lien to secure your delinquent tax debt.

IRS Tax Lien Subordination

A tax lien subordination is an agreement by the IRS to take a position “behind” another creditor. The general rule of lien position is “first in time, first in right.” This creates a problem if you want to refinance your home.

A mortgage refinance is a new loan, so a creditor that is now ahead of the IRS lien would be sent to the back of the line. A lender won’t want to give up its senior position, so you’ll only be able to get a refinance if you receive an IRS lien subordination.

You’ll either need to pay the IRS an amount equal to the subordinated interest or show them that the lien subordination is in their best interest. For example, a subordination could allow you to refinance your home with lower monthly payments, freeing up some extra cash that could be used to pay off your tax debt.

A lien discharge or a lien subordination will not eliminate the federal tax lien from the rest of your property, and it won’t eliminate any of your tax debt. But it could allow you to make some transactions that put you in a better financial position.

Tax Problem Solutions

Ayar Law provides creative solutions to your tax problems, including Offers in Compromise and IRS audit defense. Call us at 248-262-3400 to schedule a consultation with one of our tax attorneys.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.