What is a Tax Lien on Property?

by Tom Streissguth

Along with the joys of home-ownership come a few burdens, including the payment of property taxes. If you've fallen behind, it's important to remember that the local taxing authority has an automatic lien on your property in the year the tax is levied. These tax liens stay on until the tax is paid or you sell the property, at which time the lienholder takes the back taxes out of the buyer's payment.

The Ticking Clock on Tax Liens

You can resolve a tax lien by paying the back taxes, plus interest if your state law allows it. If the payment doesn't happen, the taxing authority may have the right to sell the tax lien to a third party. State law governs how cities and counties can use tax lien sales to enforce payment of back property taxes; not every state allows them. Normally, there's a statutory grace period before a taxing authority sets up an auction of these liens. In Florida, for example, taxes unpaid by an April 15 deadline can bring about the sale of a tax lien on June 1 of the same year. Indiana allows a considerably longer period of 15 months. The buyer collects the interest--at a rate set by state law--when the property taxes are finally paid; otherwise he waits for the expiration of the redemption period, goes to court to enforce the lien and takes ownership of the property.

Selling the Property

If there's a property tax lien on the house, any sale of the property means enforced satisfaction of the lien. This is one of several reasons for a title search when you prepare to sell a home: the search turns up any encumbrances on the house and ensures that the debts are cleared before the buyer takes ownership. In some states, including Pennsylvania, a property tax lien also attaches to any other property the owner has in the same state. If one house carries a property tax lien, that debt must be paid on any sale of a second house, even if property taxes on that second house are paid in full. In addition, other agencies may file other liens; the IRS, for example, can slap a lien on a home for unpaid back income taxes.

Bankruptcy and Property Tax Liens

In a bankruptcy, you file paperwork in a federal court for protection from your creditors. The automatic stay granted by the court means all collection actions, by private as well as public creditors, must stop immediately. Your assets, including real estate, become part of a bankruptcy estate. The stay is not valid for any property taxes that fall due after the bankruptcy filing. In addition, if the court holds that the property is not part of the bankruptcy estate, the taxing authority can enforce the lien. Bankruptcy won't discharge back taxes; they must be resolved eventually, either through payment out of the bankruptcy estate or sale of the property.

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