When insuring a refinance in most jurisdictions, if a federal tax lien against the current or former owner has attached to the property, the federal tax lien will retain priority over the new lender’s interest. Therefore, such liens must be listed as exceptions on the commitment and policies, the lien must be paid and the lien released, or otherwise subordinated to the lien being insured.
In some states, however, the priority of the new lender’s lien will relate back and take the priority of the deed of trust or mortgage securing the debt being satisfied. This relation back to the priority of the lien being paid off is based on the principle of “equitable subrogation”. In such states the federal tax lien will be subordinate to the lien being insured. Therefore, the federal tax lien should be shown on Schedule B, Part 2 of a loan policy as a subordinate matter. Equitable subrogation may or may not be recognized in your state. Agents’ questions regarding the law in their state should be addressed to local state or regional counsel.
When insuring a sale in which a federal tax lien against the current or former owner has attached to the property, such lien must be removed from the property by release, discharge, or subordination. Otherwise, the lien must be shown as an exception on the owner’s title policy.