Investors are always on the lookout for new opportunities. Whether it’s about buying a house for the price of a car, investing in foreclosures, or purchasing property in tax lien auctions, there are strategies and on-ramps for virtually every investor.
Paying property taxes, often assessed at the city and/or county level is one of the most important responsibilities of a property owner. Failure to pay can lead tax authorities to place a lien on the property, seize it and auction it if not paid in full. And if your investment property pays for city-owned and operated utilities such as drinking water, stormwater, or sewer services, those entities have the same attention-getting right! So let’s dive into what exactly is a ‘Tax Lien’ so that you can avoid it when it comes to your property and consider it as an avenue for investment properties.
WHAT IS A TAX LIEN?
A tax lien is a legal claim, usually filed by a federal government agency such as the Internal Revenue Service (IRS), or a county or municipal agency such as a local taxing authority, against the property of a delinquent taxpayer. While on the face of it, it may seem like the purpose of the lien is to take your home sweet home, its actual purpose is to obtain payment of the taxes owed, in much the same way that a mortgage lender will exercise their lien against a property if mortgage payments aren’t made.
If you have a tax lien against your property, it’s important to take action to clear it up as soon as possible. Ignoring the problem will only make things worse. Here’s what you need to know about tax liens and how to deal with them.
WHAT DOES A TAX LIEN MEAN FOR YOU AS A TAXPAYER OR INVESTOR?
If there is an outstanding debt such as property taxes or utility payments owed to a government entity, the entity has the right to place a lien against the property to satisfy the debt. However, just as mortgage lenders are not able to immediately sell a property upon the first missed statement, likewise government entities must see several missed payments, typically three years in the case of residential properties and five years in the case of commercial properties, before filing a security interest against the property.
HOW DO YOU GO ABOUT FINDING OUT IF THERE IS A TAX LIEN FILED AGAINST A PROPERTY?
To find out if there is a tax lien filed against a property, perhaps one that you are interested in as an investment, or your own property that you are concerned about, you can call or visit the County Clerk’s office and check the tax records. Online images of these documents are also available as well as printed copies at the Clerk’s office, for a fee. In the case of a federal tax lien, you can contact the IRS’s Centralized Lien Unit or visit their website for information.
WHAT ARE THE CONSEQUENCES OF HAVING A TAX LIEN FILED AGAINST YOU?
If a tax lien is filed against your property, one of the biggest impacts will be on your ability to sell or refinance the property. As another entity essentially has a stake in the property, you are unable to sell it, obtain additional lines of credit against it or change the current financing terms on the property without the approval of the lien holder.
HOW DO YOU GO ABOUT REMOVING OR DISPUTING A FILED TAX LIEN?
One of your first steps if you find yourself with a lien placed against your property is to contact an attorney specializing in tax liens. The IRS or other government entity that has issued the lien will send you a notice of the amount you owe and make a demand for payment; the role of the tax attorney will be to evaluate your records with you to determine if there are any errors in the amount or in the process that was followed by the government authority, and dispute the demand if so. And should the amount and demand request be accurate, the attorney can help you negotiate a settlement, which could include payment of a much lower amount through the waiver or reduction of penalties, interest, and back taxes.
FAQs ON TAX LIEN – READER’S MOST COMMONLY ASKED QUESTIONS ANSWERED
WHAT ARE TAX LIEN CERTIFICATES?
Municipal governments often prefer not to take on the role of selling properties that are behind on their taxes. To avoid being the seller while still obtaining payment on the amount, the municipality will create a tax lien certificate equal to the amount that is owed. The tax lien certificate will serve as a tool or instrument offered for sale, via an auction, by the local municipal government, to collect payment. Proceeds from the auction enable the municipality to recover unpaid property taxes, in this case, not from the owner, but from the auction participants. The winning auction bidders then become the owners of the security interest in the properties, and with it, take on the responsibility and the cost of foreclosing on the property after three or more years of unpaid taxes or utility bills by the property owner. Tax lien certificates also entitle the certificate owner to the interest payments on the unpaid debt, thus functioning in much the same way as a bond.
WHAT IS THE DURATION OF A TAX LIEN?
Ten years is the basic limitation set by the IRS. If the defaulter pays the lien in full or as stated in a negotiated settlement agreement, then the IRS will remove the lien and its right to seize the property. The IRS is required to remove the lien within thirty days of the taxes in question being paid.
WHAT IS A TAX SALE?
The sale of property that has unpaid taxes on it will often occur through a tax lien auction, where the buyer purchases an ownership interest in exchange for paying off what is owed, along with any fees or costs associated with this process. Tax sales were originally used as methods to collect delinquent debts but have since been expanded into more general usage by government entities.
SUMMING IT UP
So, what is a tax lien? It’s the government’s way of ensuring that back-owed taxes or other government payments are paid – with interest and penalties. If you have a tax lien filed against you, it means the government has placed a claim on your property, which will remain until the outstanding amount is paid or the property is sold by the lien holder.
The consequences of having a tax lien can be serious, including losing the property and lowering your credit score. But there are ways to dispute or remove a filed tax lien if it doesn’t belong to you or if you think the amount claimed is incorrect.
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