Using a Texas Home Equity Loan to Pay the IRS: Rules, Liens, and Tradeoffs

When a Texas homeowner owes the IRS and has equity in the house, someone eventually suggests a cash-out loan. Pay the IRS off, stop the interest and penalties, and owe a bank instead at a lower rate. Sometimes that is exactly right. Sometimes it turns a dischargeable or settleable tax debt into a secured debt against your home.

Texas makes the decision more complicated than in other states. Home equity lending here is governed by the Texas Constitution itself, and the rules are unusually strict. Add a federal tax lien and you have two sets of rules colliding at the closing table.

Texas home equity rules, briefly

Texas Constitution article XVI, section 50(a)(6) governs home equity loans on a homestead. I describe these rules as general information. Confirm the specifics with your lender and a Texas attorney who practices in that area, because the details matter and the consequences of noncompliance fall mostly on lenders, who therefore follow them rigidly.

Among other requirements, the total of all debt secured by the homestead, including the new loan, generally cannot exceed 80 percent of the home's fair market value. The loan generally cannot close until at least 12 days after the borrower receives a required written notice. There are limits on how often you can take a new home equity loan, required in-person closing locations, fee limits, and a right to rescind after closing. Spouses generally both must consent.

The practical effect: you need meaningful equity, and you need time. If a levy is imminent, a Texas home equity loan may not close fast enough to stop it.

The federal tax lien at closing

If the IRS has filed a notice of federal tax lien, the lender's title company will find it. No lender will make a home equity loan behind a federal tax lien without dealing with it. There are two common paths.

First, payoff. If the loan proceeds will pay the IRS balance in full, the title company requests a payoff figure, pays the IRS at closing, and the lien is released under IRC 6325(a) once the liability is satisfied. This is the cleanest outcome.

Second, subordination. If the loan will pay only part of the balance, the lender will want the IRS to subordinate its lien so the new loan has priority. IRC 6325(d) allows that. Under 6325(d)(1), the IRS can subordinate if it is paid an amount equal to the lien interest being subordinated, and under 6325(d)(2), if subordination will ultimately increase the amount the IRS collects. The application is Form 14134, and IRS Publication 784 explains the process. Subordination takes time, so start early.

Lien details, including withdrawal after payment, are covered in my guide to the federal tax lien on Texas property.

How the IRS already sees your home equity

If you are negotiating with the IRS instead of paying, your home equity is already part of the conversation. For an offer in compromise, IRM 5.8.5 values assets at net realizable equity: quick sale value, minus loans with priority over the federal tax lien. Quick sale value is generally less than fair market value. For installment agreements over certain thresholds, revenue officers look at equity too and may ask whether you can borrow against it.

That means a home with substantial equity often makes an offer in compromise impractical, because the IRS expects you to access the equity first. On the other hand, the IRS generally will not force a borrowing you cannot qualify for or afford to repay. If no lender will approve the loan because of income, credit, or the 80 percent cap, document the denial. That becomes evidence in the negotiation.

My Texas homestead guide covers what the IRS can and cannot do to your house directly.

Is the interest deductible?

Usually not when the proceeds pay taxes. Under IRC 163(h)(3)(F), for tax years after 2017, interest on home equity indebtedness is not deductible, and 2025 legislation made that rule permanent. Interest is deductible as qualified residence interest only if the debt is acquisition indebtedness, meaning debt used to buy, build, or substantially improve the home, within the $750,000 limit for debt incurred after December 15, 2017.

Proceeds used to pay federal income taxes are personal interest and not deductible. Do not count on a deduction to make the math work.

When borrowing against the house is a mistake

Here is the part most people miss. Unsecured federal tax debt has options that a mortgage does not. Some income tax debts can be discharged in bankruptcy if the timing rules are met. The IRS collection statute generally gives the agency ten years to collect, and a debt that is close to expiring may be worth very little. Hardship status can stop collection entirely. An offer in compromise can settle for less.

Once you pay the IRS with a home equity loan, all of those options are gone. You owe a bank, secured by your homestead, and the bank does not offer currently not collectible status. If you later cannot pay, you can lose the house to a lender that has every right to foreclose.

So before borrowing, look at the whole picture: how old the tax years are, when each collection statute expires, whether bankruptcy discharge is possible, and whether an installment agreement at a manageable payment would do the job without putting the house at risk.

When it makes sense

• The tax years are recent, so the collection statute is far from expiring and bankruptcy discharge is not available.
• You have stable income to repay the new loan comfortably.
• The IRS balance is growing quickly from interest and the failure-to-pay penalty.
• Paying in full gets the lien released and clears your credit and title before a sale or refinance.
• An offer in compromise is not realistic because of your equity.

A home equity loan is a tool, not a rescue. It solves the IRS problem by creating a new one with your house on the line. Make that trade with your eyes open. If you want a second opinion on the numbers before you sign a Texas loan application, call me: 813-229-7100. The firm's guide to what to do when you owe the IRS is a good starting point too.