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What Is a Tax Lien? The Basics

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tax lien is a legal claim that a government agency can place on your property in order to recoup delinquent taxes. This lien ensures that the government will be first in the line of creditors after your assets should you default on your obligations. It will appear during any title search and essentially means your property is not entirely your own, even if you have paid off your mortgage. Until you pay off your tax bill, you cannot refinance or sell your property.

Government entities usually give the property owner a reasonable period to clear their debt. If the debt isn’t cleared during the specified time frame, it may mean the property owner has decided to abandon ownership of the property.

Who Can Levy a Tax Lien? 

Your home county can place a tax lien on your home or business if you fall behind on your property taxes. The county government may not immediately take this step, especially if you make a payment arrangement with them for the amount owed. If you do not make a good faith effort to pay your tax balance, however, the county government has a few harsh options at its disposal. One of these is to place a tax lien on your property until you pay off the tax balance or make arrangements to pay it. 

Failure to pay property taxes is not the only way to incur a tax lien. Income tax balances can also place your homeownership in danger. If you do not pay your annual taxes, the state and the IRS can place a lien on your property to ensure that you make arrangements to pay your balance. 

If a tax lien does not work, the government entity involved may move to seize your property and sell it to get the money you owe. Other creditors can sometimes have a lien placed on your property, but these differ a bit from tax liens.

The Tax Lien Process

The government will warn you before placing a lien on your property. First, you will receive a demand for payment. At that time, you should respond by either paying the balance owed or by creating a payment plan that the government will accept. 

If you ignore the demand for payment, they can place a lien against your property, meaning that you cannot sell or refinance it privately. In the case of the IRS, the tax lien will attach to all of your property, including securities, vehicles, and business assets. 

Even bankruptcy will not erase a federal tax lien or debt. Federal tax debt remains until you resolve it. So even if the government forces a sale of your home and other property, if the amount realized does not cover your debt, you owe the remaining amount.

The Tax Lien Sale

Failure to resolve your tax lien may result in a tax deed sale: a forced sale that allows the government to take your tax arrears out of the sales price. After all debts and penalties are resolved, you will receive the remaining sale proceeds, but these will usually be much less than the amount that can be earned from a voluntary sale. 

Government entities in some areas may also sell your debt to a third party through a tax lien sale. During this sale, a business or individual can buy your tax lien, and you would now owe the third party your back taxes, penalties, and interest. 

While the third party does not get ownership of your property, they do get a tax lien certificate. If you do not pay your back taxes by an established deadline, the holder of the tax lien can usually foreclose on the lien or try to get the title to your property.

Redemption Periods

If a tax lien certificate on your property is sold, you may still be able to get your home back. The original property owner receives a redemption period, sometimes a lengthy one, to pay the back taxes and remove the tax lien from their property. If you have a tax lien, you should have ample time and options to remove it. 

Tax Liens for Investments

While a tax lien is a real estate problem for some, it is a real estate opportunity for others. Savvy real estate investors can turn these tax liens into solid profits. 

Tax lien sales sometimes result in a significant ROI. If you can purchase a lien cheaply and have the patience to wait out the process, you can acquire valuable property at a bargain price. 

Of course, many real estate investors have the same idea, so you may face a spirited bidding war for these liens. If you win a bid, you must have the financial ability to wait for the payoff, realizing that it may not occur. Homeowners often do redeem their properties, sometimes years after the tax lien sale. 

But, if you understand the process and have researched the properties, your tax lien certificates can reap huge rewards.

Finding Tax Lien Properties

Before investing in tax liens, you need to find desirable properties and learn all you can about them. There are several ways to go about this. You can visit your county assessor’s office and ask for a list of tax lien sales. This may be free, or the county may charge a reasonable amount for the list. Local realtors often have insight into delinquent tax properties and may share valuable information. You can also use online databases like ProspectNow to find and research potential tax debt properties. 

The Prospect Now Advantage

Tax liens are potential moneymakers that are worth exploring. But using tax liens to turn a profit can be tricky, so before investing in one, you need to be fully informed.

If you want to buy a home with a tax lien, turn to the extensive property databases of ProspectNow. As a trusted resource in the real estate industry since 2008, we have developed an in-depth database that includes more than 100 million residential properties and 42 million commercial ones. 

Use our online site to find information on properties with unpaid back taxes. Contact us now for a free trial and access to accurate data. We’ll help make the tax system work for you.

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