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What Is a Tax Lien Foreclosure?
A tax lien foreclosure is the sale of a property resulting from the property owner’s failure to pay their tax liabilities. The process begins when a government places a lien on the property of a person who has not paid their taxes. This isn’t limited to property taxes; liens can also result when a person does not pay their federal or state income taxes.
When a government authority places a lien on a property, it issues a certificate for this lien. The tax lien certificate can later be sold to a buyer who pays off the underlying tax obligation. This buyer then becomes the new holder of the lien certificate, giving them legal claim to collect the underlying debt and interest on it. A property owner can redeem a lien certificate on their property by paying off the amount owed plus interest and fees. If they fail to do so, tax lien foreclosure proceedings may be initiated.
Key Takeaways
- If a property owner fails to pay taxes on their property, it may eventually result in a tax lien foreclosure.
- This is a process by which government authorities can address delinquent property taxes, as well as other taxes like state and federal taxes owed.
- First, government authorities place a lien on the property of a person who has not paid their taxes, issuing a certificate for it.
- This certificate may later be sold in an auction to make up for the missing tax revenue; the lien certificate buyer can then collect interest on the lien.
- If the property owner does not pay off the amount owed plus interest and fees within a certain window of time, tax lien foreclosure proceedings may be initiated.
How a Tax Lien Foreclosure Begins
A tax lien foreclosure is one of two methods a government authority may use to address delinquent taxes on a property; the other is called a tax deed sale.
To begin the process, a statutory lien is first placed against the property of the person who has failed to pay taxes. Tax liens can be specific liens against specific property—for example, with property taxes and special assessment liens. They can also be general liens against all property of the defaulting taxpayer, as in the case of federal or state income tax liens.
The lien is represented by a tax lien certificate, which may be sold by the state to a trust or investor through a public auction. Tax laws prevent the owner of the property, who failed to pay their taxes, from bidding at the auction. Tax lien certificates accrue interest at a set rate, making them a potentially attractive investment since they are tied to a hard asset—that is, real estate. In Arizona, for example, investors can receive up to 16% per annum on a tax lien certificate.
Redemption Period for a Tax Lien Foreclosure
In some tax lien foreclosure proceedings, the property owner may sometimes be granted a redemption period—a specific period during which the original owner has an opportunity to pay the lien and other fees. During the redemption period, which can be as short as three months or as long as three years, interest and penalties accrue to the investor holding the tax lien certificate. If and when the debt is resolved, the investor is reimbursed their investment plus accrued interest and fees on the resolution date.
The redemption period may beging before or after a foreclosure auction has been held.
If all attempts to collect on the delinquent taxes have been exhausted and the redemption period expires, the lien holder can initiate a judicial foreclosure proceeding against the property itself. The court then orders a foreclosure auction to be held to collect the money to satisfy the unpaid tax lien. Tax lien foreclosure proceedings generally result in the lien holder acquiring the property.
Tax Lien Foreclosure vs. Tax Deed Sale
Foreclosing against the property may also be done through a tax deed sale. In a tax deed sale, the property itself is sold. The sale that occurs through an auction has a minimum bid of the amount of back taxes owed, plus interest, as well as the costs associated with selling the property. Any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner, depending on the jurisdiction.
Can You Lose Your House Not Paying Property Taxes?
Yes, if you fail to pay your property taxes, it’s possible to eventually lose your house through various processes. This includes through a tax deed sale, in which a government entity auctions off a property in order to recoup unpaid taxes on it, as well as through tax lien foreclosures.
What Is the Difference Between a General Lien and a Specific Lien?
A specific lien is a claim against a specific piece of property, whereas a general lien is applied to some or all of an individual’s property. In the context of unpaid taxes, a specific lien may apply to just one particular property for which the owner has not paid property taxes. If that property is affected by a lien foreclosure, other assets might not be directly affected.
What Is a Sheriff’s Sale?
A sheriff’s sale is one type of auction in which property is sold to the highest bidder to pay off debt.
The Bottom Line
A tax lien foreclosure is a process by which the holder of a tax lien can obtain the amount owed to them.
When a person fails to pay taxes, such as property taxes, a government entity can place a lien on the property. The government may then sell this lien to a buyer, who pays off the outstanding taxes, thereby settling the tax debt with the government. The new holder of the lien can now collect interest on top of the debt from the property owner. If the property owner pays off their debt, plus interest and fees, this translates to a return on the lien. If they do not, then the lien holder can initiate a tax lien foreclosure. If approved, a foreclosure auction is held to collect the money to satisfy the unpaid tax lien. Such proceedings generally result in the lien holder acquiring the property.