Glossary

Tax Lien Subordination

What is Tax Lien Subordination and When Does it Matter?

Tax lien subordination is when a tax lien, which is typically a high-priority debt against a property, is voluntarily moved lower in the order of payment priority. This means another lender or lienholder can get paid before the government for the tax debt. It usually happens when a property owner needs to refinance or take out another loan.

Understanding Tax Lien Subordination

Tax liens can be a real headache for property owners, especially when they’re looking to refinance or sell their homes. But what happens when you have a tax lien and want to take out a new mortgage or a home equity loan? That’s where tax lien subordination comes into play.

Why Tax Liens Have Priority

Before we dive into subordination, let’s quickly understand why tax liens usually have such a high position in the payment pecking order. When you don’t pay your property taxes, the government can place a tax lien on your property. This lien acts like a claim on your property. Think of it as a legal “I Owe You” note. It’s secured by your property. Because these are government debts (local or federal), they typically get paid before most other debts, including mortgages and other loans. This is called a priority position. This priority ensures the government gets the funds it needs to operate.

The Need for Subordination

So, where does subordination fit in? Imagine this scenario: You have a tax lien on your home, and you want to refinance your mortgage to get a better interest rate. The lender might be hesitant. They know that if they loan you money, the existing tax lien would have to be paid off first before they see any of their money back in the event of a foreclosure. In many cases, lenders require a “first position” lien. This is where tax lien subordination can help. It’s like telling the government, “Hey, can you go down the line a little so that the new lender has a better chance of getting paid?”

Subordination is not automatic. The government (or relevant taxing authority) must agree to lower the priority of its lien. This is done by a subordination agreement, a legal document that states the change in the priority of liens.

How Tax Lien Subordination Works

The Request: The property owner (or more often, the lender) requests the taxing authority to subordinate their lien. This is done in writing. The request will usually explain why subordination is necessary.
Review: The taxing authority will review the request to determine if subordination makes sense. They will consider various factors, such as the value of the property, the amount of the existing tax lien, and the amount of the new loan. There’s no obligation to grant a subordination, so it’s important to present a strong case.
Agreement: If the taxing authority agrees, they will sign a subordination agreement. This agreement legally states that the government’s lien will take a lower priority. It’s like a contractual swap in the payment pecking order.
Recording: The subordination agreement is typically recorded in public records, making the change of priority official. This is very important. It makes sure everyone is aware of the change of lien position.
Priority Shift: After the subordination agreement is in place, the new lender is in a higher priority position. In the event of a foreclosure, they would get paid before the government for the tax lien.

Scenarios Where Tax Lien Subordination is Used

Refinancing: As mentioned, this is one of the most common uses. It allows homeowners to refinance their mortgage, possibly saving a lot of money in the long run. It’s also important because many lenders will not give mortgages unless they are in a first lien position.
Home Equity Loans: When a homeowner needs a home equity loan, lenders will typically want their new loan to have a priority position. If there’s an existing tax lien, subordination may be needed.
New Construction or Renovation Loans: Sometimes, property owners take out loans for large construction projects. Again, lenders want the security of a first-priority position, so the existing tax lien may need to be subordinated.
Selling a Property: It’s unlikely that a buyer will be willing to purchase a property with a tax lien if it’s in a priority position. So subordination might be part of the sale process to allow the transaction to close, and the tax lien will then be paid off from the sales proceeds.

Who is Affected by Tax Lien Subordination?

Property Owners: Homeowners who have tax liens and need to refinance or obtain other financing are directly affected by this.
Lenders: Banks and other financial institutions involved in mortgage refinancing or home equity loans need this process to secure their loans. They will often initiate the request for subordination.
Government/Taxing Authorities: Local and federal governments are involved because it’s their tax lien that is being moved down the priority ladder.
Real Estate Professionals: Agents and attorneys who assist in real estate transactions involving tax liens need to understand this concept.

Related Concepts

Tax Lien: A legal claim against your property for unpaid taxes.
Lien Priority: The order in which debts are paid in the case of foreclosure. Tax liens usually have a high priority.
Subordination Agreement: The legal document that outlines the change in lien priority.
Refinance: Replacing an existing loan with a new one that has more favorable terms.
Home Equity Loan: Borrowing money using the equity you’ve built up in your home.

Tips and Strategies

Be Proactive: If you know you owe property taxes, try to resolve the matter before a lien is filed.
Seek Expert Help: If you have a tax lien, and you need to obtain a mortgage, it’s wise to consult with a tax advisor or real estate attorney to help you navigate this process.
Understand the Terms: Carefully review any subordination agreement before signing it. Ensure that you and the lender understand the implications of changing the lien priority.
Negotiate: While not guaranteed, you may have some negotiating power. Talk to the taxing authority about the specific circumstances. They might be willing to work with you, especially if you can show that refinancing will help you better manage your financial situation.
Provide Transparency: Be upfront with the taxing authority about your reasons for needing the subordination and provide supporting documentation.

Common Mistakes and Misconceptions

Subordination is Automatic: It’s not automatic. You must have the taxing authority’s agreement.
All Subordination Requests are Approved: Taxing authorities don’t have to approve every request. They might decline if they feel the risk is too high.
Subordination Eliminates the Tax Lien: It does not erase your obligation to pay your taxes; it just changes the order in which the debt gets paid. You still owe the debt.
Subordination is Always Beneficial: It can be beneficial in the right situation, but it can also make the lender less secure. So it’s not without its drawbacks for everyone involved.

Tax lien subordination may seem complex, but it is often a necessary procedure for individuals looking to improve their financial situation. Understanding how it works can be beneficial to homeowners, lenders, and anyone involved in real estate transactions. The main takeaway is that tax liens usually have high priority, and subordination is a process to temporarily lower their position. It is usually required to obtain other forms of financing.

Recommended for You

Coastal Workforce Renewable Electrification Equity Credit

The Coastal Workforce Renewable Electrification Equity Credit incentivizes clean energy employment in coastal areas, offering financial benefits to qualifying taxpayers aiding in sustainable industry growth.

Form 8038 – Information Return for Tax-Exempt Private Activity Bond Issues

Form 8038 is an IRS form used to report the issuance of tax-exempt private activity bonds. It ensures compliance with federal tax laws concerning these types of bonds.

Renewable Workforce Electrification Modernization Expansion Credit

The Renewable Workforce Electrification Modernization Expansion Credit is a tax incentive aimed at encouraging businesses to upgrade their workforce towards clean energy initiatives.

CP176B Penalty for Incorrectly Reported Real Estate Tax Deductions

The CP176B Penalty addresses inaccuracies in reporting real estate tax deductions. Understand its implications and prevent costly mistakes in tax filings.

Tax Deficiency Notice

A Tax Deficiency Notice is issued by tax authorities to inform taxpayers of an underpaid tax amount due. It outlines necessary corrections and payment instructions.

Abatement for Misreported Business Depreciation Deductions

Abatement for misreported business depreciation deductions helps rectify tax errors related to improper reporting of asset depreciation on business tax returns.

CP504H Notice

The CP504H Notice is an IRS alert indicating an outstanding tax debt subject to collection actions unless resolved promptly.

CP22A Notice: Changes to Your Tax Return Resulting in a Balance Due

A CP22A notice is sent by the IRS to inform you that changes were made to your tax return, resulting in an additional tax liability (meaning you owe money). It's crucial to understand this notice to take appropriate action.

Title Search Lien Identification

Title Search Lien Identification involves uncovering any liens attached to a property, crucial for both buyers and sellers to ensure clear property titles and compliance.

Fraud Penalty

Fraud penalties in taxation refer to fines and legal consequences imposed on individuals or entities for intentionally deceiving tax authorities to avoid taxes.

Workforce Renewable Energy Training Incentive Credit

The Workforce Renewable Energy Training Incentive Credit is a tax credit designed to encourage the training of individuals in the renewable energy sector.

Low-Income Urban Farming Credit

The Low-Income Urban Farming Credit is a tax incentive offered to individuals and businesses that engage in urban farming activities in low-income areas. Its aim is to promote food access, stimulate local economies, and support sustainable agricultural practices.

Workforce EV Inclusion Job Training Credit

The Workforce EV Inclusion Job Training Credit is a tax incentive designed to support businesses in providing training for electric vehicle (EV) jobs. This initiative helps enhance workforce skills in the EV sector by offering financial credits to eligible employers.

Renewable Workforce Public Development Credit

The Renewable Workforce Public Development Credit is a tax incentive designed to promote job creation in the renewable energy sector, offering businesses credits to support workforce development and training.

EV Accessibility Innovation Credit

The EV Accessibility Innovation Credit is a tax incentive designed to encourage innovation in creating accessible features for electric vehicles (EVs).

Special Taxing District Liens

Special Taxing District Liens are charges levied on properties within designated areas to fund specific services or improvements, with legal obligations for compliance.

Waiver for Self-Employment Income Errors

A 'Waiver for Self-Employment Income Errors' allows taxpayers to address unintentional self-employment income inaccuracies without significant penalties.

Payment Modification

Payment Modification refers to changes made in a taxpayer's payment plan with tax authorities to ensure more manageable compliance. It can prevent penalties and aid financial management.

Coastal Renewable Electrification Development Job Credit

The Coastal Renewable Electrification Development Job Credit is a tax incentive aimed at fostering job creation in renewable energy sectors along coastal regions.

Translation and Localization Services Deduction

Translation and Localization Services Deduction allows businesses to deduct costs related to translating and localizing content for different markets.