More on Tax Liens

To understand the definition of a tax lien, one must first understand the definition of a lien. A lien is any sort of charge against an item of property that guarantees payment of a debt, usually of that property. For example, in a financing situation where a bank lends money for the purchase of an automobile, the bank has a lien on the automobile. This lien, or hold, can be released upon payment of the debt and it would be said that the property is entitled to the purchaser, free and clear. The same principle applies to the situation of financing a house through a mortgage broker although it is not an identical situation to the purchase of an automobile. In any case, however, liens usually entitle the lien holder the right to repossess the property if timely payment is not made or some arrangement is not made.

A tax lien is imposed by law on property to secure the payment of taxes. They may be imposed on real or personal property for delinquent taxes and/or the failure to pay any sort of taxes on the property or even income taxes. As opposed to personal debts, tax liens on real estate do what is called ‘running with the land,’ this means that a property owner becomes responsible for payment even if the tax obligation was incurred by a prior owner. Various states have different laws regarding this matter but depending on the law of jurisdiction, the owner of the property may be held personally liable for the payment of all relevant taxes. Payment of a tax lien may be made directly by the property owner, or in some cases may be paid indirectly by the mortgage holder. Notice is always given to both the property owner as well the mortgage holder when a property tax is delinquent so all parties involved are kept ‘in the know’ regarding the tax situation.

As noted earlier, if a tax lien on a personal property is not paid within a specified time, the property may be seized and sold at a foreclosure sale. This generally takes place after several notices are given and attempts are made to establish contact and/or payment. If a property is sold by the owner prior to tax foreclosure, the tax lien is most often paid as part of closing costs from the sale proceeds. In dealing with the result of foreclosure on a piece of real property, one of two methods may be used. The property may be seized and sold in what is called a tax deed sale. The other method can vary from state to state but the tax lien may be offered to investors in the form of what is called a tax lien certificate. This accompanies the right for the investor, after a specific period of time has passed, to begin foreclosure proceedings. This is known as a tax lien sale. It goes without saying that it is best to stay current on the payment of taxes on property as this saves time and frustration in dealing with foreclosure proceedings.