Tax Lien - Understanding Tax Liens
Most homeowners have heard of liens, but the liens that we are generally familiar with are the liens that can be placed against our homes when we fail to pay credit card bills, home repair bills, landscaping bills, department store bills, and just about any other bill that one can be brought to court for. The type of liens that most of us are familiar with are judgment liens, but there are also tax liens. Much like judgment liens, tax liens are imposed when homeowners fail to pay a bill. But this time, the bill is the almighty tax bill. While most of us would never think to not pay our tax bill, circumstances often put the best of us in situations where we just can’t pay that huge city, county, state, or even federal tax bill.
Most homeowners have many taxes to pay each year in addition to state and federal taxes such as city or town taxes, water district taxes, school district taxes, and taxes for the sewer district, Port Authority, road district, public hospital district, fire protection district, flood control district, transit district, the library district, and many others. The property tax bill that you get from the government usually pays a small portion of tax to all of these districts, and then some! Obviously, if everyone failed to pay their taxes civilization as we currently know it would cease to exist and that is why failure to pay taxes results in an action or process known as a tax lien.
When taxes are due for each individual often differ from county to county and state to state, but one thing is certain, when you get your bill you are expected to pay all of your taxes by the due date. If you know that you cannot pay your taxes by the due date you can usually file an extension, but inevitably, one must pay their taxes. For those that don’t take the process seriously enough, the government has recourse in the way of tax liens. There is usually a statutory or redemption period in which the government simply sends reminders stating that the taxes are delinquent. When the period is up a judge will order that the property will have a tax lien attached to this. What this means is that the home cannot be sold without the tax lien being paid. Not only will the entire delinquent tax amount need to be paid, there is usually a steep interest rate applied to the lien so that you cannot simply choose not to pay your taxes for long periods of time.
If for some reason the tax lien is not paid off at the time of sale because it was not on the books at the time of sale, the new owner will be responsible for the taxes that are owed. This is where a trip to the land records office becomes very important. Because tax liens are not always due when a house is sold, you may end up owing money for the taxes that someone else did not pay! Knowing what is owed is important, especially when you are buying a foreclosed or repossessed home.
Tax Lien Information
It’s also important to note that if there are federal tax liens against the home when it is purchased, the IRS has 120 days to reclaim the home and need only pay the new owner the price that they purchased the home for. The problem with this is that a lot of changes, upgrades, and money can be put into a house in the first 120 days it is owned and the IRS will not reimburse the new owner for these upgrades. If the new owner cannot afford to pay off the federal tax lien, it is just a risky idea to buy the home because it can be taken back by the IRS at any time during those first 120 days. This doesn’t seem fair, but this is the way federal tax liens work, and many people go into a situation where federal tax liens are owed without knowing the repercussions and end up very sorry for not thoroughly investigating exactly what a tax lien is and the differences between tax liens that are the result of unpaid county, city, state, or federal taxes.
Another thing to keep in mind for those that are looking at pre-foreclosure homes is that for a home to become legally yours, you’ll need to pay off the federal tax liens. If you cannot afford to pay off the liens yourself, you’ll need to make sure that you get the house at a discounted enough rate that you will be able to pay off the federal tax liens as well as fix up the house, if need be.
Tax liens don’t have to be a big deal, as some people just neglected to pay a few dollars of tax and a lien was subsequently put against the home. The problem is that the lien has to be paid before the home can be sold. Doing a title search at your local land records office will help you determine what sort of debts the house has attached to it and which of those debts you might become responsible for. Remember that tax liens do not have to be a deal breaker, but you’ll want to consider how affordable or unaffordable these liens make the house. If the tax lien is a huge amount, it can make purchasing the house more of a liability than an asset because you are sinking money into the home before it’s legally yours! The land records office will be able to provide you with all of the liens against the home, or you can pay a records search company to find the information for you. However you find the information, it’s very important that one knows about the liens against a particular property before they purchase it. As with most things concerning taxes and the purchasing of a home, the more knowledge you have the better!
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