Tax Liens: What They Are and How They Affect You
Tax liens are a legal hold or claim which is placed on property of any description to secure the payment of taxes. A tax lien may be placed on personal property or real estate property as a result of delinquent taxes on that particular property. They can also be placed on property as a means of guaranteeing payment of income taxes or other taxes which have not been paid.
The most common tax liens encountered are those placed on real estate property. These are different to those placed on personal property in that they are inherited as a property is passed on. So if you purchase a property which has tax liens placed on it then you become responsible for payment of that tax.
If there is delinquent tax identified on a property then a notice will be served to the property owner and the mortgage holder. If you are buying a property then the best way to find out whether a tax lien already exists on the property is through a title search.
When a property is sold prior to the owner foreclosing tax to the government, any tax lien on a property will usually be paid from the sale proceeds as part of the closing costs. If the tax lien is not disclosed at any stage it will then just pass on with the property.
Sometimes the mortgage holder will automatically pay the debt immediately on receiving the served notice and then invoice the property owner for the money owed. This usually happens due to tax liens being classed as higher priority than the mortgage, so the mortgage holder needs to protect their own repayments.
If this doesn't happen, there are several different methods which can be used to make payment of taxes to remove a tax lien on a property. The property owner may choose to pay the tax debt directly, but would more often go through the mortgage holder using an escrow account.
If the tax lien is not paid within a specified time then the property (whether personal or real estate) may be seized and sold to recover the money owed. Sometimes in the case of real estate property tax liens the debt may be offered to investors who would then be able to initiate foreclosure proceedings at a later date if the debt were still not paid.
Rules for the precise procedures to deal with an unpaid lien differ from state to state although are most often used in cases of delinquent federal tax such as income tax, gift tax and real estate tax.
If a tax lien is issued to you always try and pay it immediately to avoid having your property seized, and remember to check for existing tax liens when investing in real estate.
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