Tax bills are typically the largest annual cost to a property owner aside from mortgage obligations. Unlike personal debts, tax liens on real estate “run with the land” meaning the current owner is responsible for payment even if the “debt” was from a previous owner.
There are several methods of payment for any existing or outstanding tax liens/judgments on a property. The first is payment made directly from the property owner or indirectly from a mortgage holder using what is called an escrow account. Local oversight gives notice to both the homeowner of record and the mortgage holder that the tax bill is delinquent. Often times the mortgage holder pays the tax. The mortgage holder will then demand repayment from the owner or primary borrower, or create an escrow account to pay tax. The mortgage company may risk losing value on the mortgage lien if the property was sold by the taxing agency.
If the owner is successful in selling the property prior to any tax foreclosure, typically the tax lien on the property is paid as a part of closing costs at transfer of sale. Local legislation typically dictates the processes from state to state when it comes to procedure for handling delinquent tax liens associated with any given property. When taxes are not paid or brought current, the property may be seized and sold at foreclosure/tax auctions. This is called a tax deed sale.
Federal tax lien basics
Internal Revenue Code section 6321 provides:
- Sec. 6321. LIEN FOR TAXES.
- If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.
Internal Revenue Code section 6322 provides:
- Sec. 6322. PERIOD OF LIEN.
- Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.
Often times lenders or mortgage companies are willing to work with a struggling homeowner to bring past tax delinquency up to date. Loss Mitigation companies are also capable of consolidating these past due amounts with existing credit card bills, car loans and “construction loans”. Lien priority will still apply, and tax liens often times have higher priority than other lien claims.