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 When we first put this article on tax liens together, we weren't sure if it belonged in the Investing, Buying a Home or Tax section of this publication. That's because the subject of tax liens cuts across all three of these areas depending on your perspective.
What is a Tax Lien?
A tax lien can be thought of as a claim filed against a real estate property whose owner has failed to pay some type of tax. The property usually can't be sold or refinanced until the lien is paid off. Tax liens can be filed by just about all government agencies. Sometimes these liens are even filed by private companies or individuals.
If we break this definition apart, we see that a tax lien usually involves real estate although it can also involve other forms of personal property. A lien is placed on the property when the owner fails to pay, or is delinquent in paying, certain taxes. Less common are tax liens that involve other fees owned to a government agency.
For example, in New York City, if you don't pay your water bill and you've run up a bill of $1,000 or more that you owe the City, then they can file for a tax lien against your property. In most situations, however, tax liens are issued because of delinquent property taxes.
When a tax lien does involve real estate and the property does exchange hands, the obligation of repayment is said to "run with the land." That means the new property owner is now responsible for repayment of taxes owed even if the non-payment occurred because of a prior owner. This is one of the reasons a title search and title insurance are so important to new home buyers.
Tax Lien Rules
The thresholds vary by state, but after a certain amount of time has passed, the county government has the right to issue a tax lien against the property if real estate taxes have not been paid. Once the lien exists, the homeowner usually cannot sell the property without first satisfying the lien. In other words, he or she has to pay the taxes and any penalties owed to remove the lien.
Because county governments need this money to provide adequate and essential services to all members of their community, the law allows for the selling of tax lien certificates or tax deeds. This can be an ideal situation for both the investor buying the tax lien certificate and the county. The county gets the money owed, and the investor now has two rights by holding the certificate:
- The right to the taxes owed and all accruing tax penalties and interest payments.
- The right to the property itself through a foreclosure proceeding if repayment is not made in a timely manner.
Profits from Tax Liens
This is where the investor's potential for profit comes into play. Some investors would view tax liens as a safe investment with a high return because the investor is either going to get paid the money owed or is going to own the property. But like many investment opportunities that seem too good to be true, tax lien investing should not be viewed as a money-making machine:
- The time a lien certificate is held and the process of notice before foreclosure varies. You need to check with the county tax assessor's office to determine the exact process.
- A majority of liens are satisfied before foreclosure on the home or property takes place - especially if the property is in good condition.
Just like other investments, make sure you do your homework on any property you are interested in. Does the home sit in a flood plain? What is the real value of the property? Remember, there will be other shrewd investors that will be competing with you at the tax lien auction. They've done their homework, make sure you do yours.
Federal Tax Liens
A federal tax lien can be placed on a property if the owner fails to pay any federal tax including income taxes, gift tax or inheritance / estate taxes. The process that occurs with federal tax liens is a little different than with property taxes. In the first step of this process, the person held liable for the payment of taxes is notified.
After formalizing the assessment against the party involved, a written "demand" is sent by the IRS. In most cases, the liable party has ten days after receipt of this written demand to pay the taxes owed. If the property owner fails to make payment before the tenth day, then a tax lien is automatically placed on the property.
Expiration of Tax Liens
Unless another date is specified by law, a federal tax lien will continue until the assessment has been satisfied or until the statute of limitations is reached at which time the lien is no longer considered enforceable. Unless an exemption applies, the statute of limitations for a federal tax lien is ten years starting on the date of the assessment.
Notice of Federal Tax Lien
In some instances, multiple government agencies or other creditors many have in-place competing liens against the same property. When this occurs, "perfection" of the tax lien will determine which agency or creditor's lien has priority over another. In most situations, the tax lien that was perfected first takes priority over all others.
The federal government will file a Notice of Federal Tax Lien, or NFTL, in order to "perfect" its tax lien and file this notice with state and county agencies where the property is located.
Liens Based on Property Value
When a lien is placed on a property and the tax is related to the property's value - as is the case with property taxes - federal law allows a state's lien to take priority over a federal tax lien. This holds true even if the NFTL was filed prior to the state issued lien.
Release of Federal Tax Liens
When the taxes owed have been paid, the IRS will normally issue a Release of the Notice of Federal Tax Lien. Alternatively, this notice is sometimes issued when the IRS is simply no longer interested in collecting taxes owed. The IRS has standard operating procedures that they follow on all these matters.
As a general rule, the IRS will remove the lien within 30 days of payment. The process is considered final when the taxpayer receives a Certificate of Release of Federal Tax Lien.
Tax Liens versus Tax Levies
While a tax lien and the Notice of Federal Tax Lien provide the property owner with notice and intent to secure or seize a property; it is via a Notice of Intent to Levy that provides the IRS with the ability to take or seize a property by any means possible.
In general, once a notice of levy has been issued, the IRS does not have to seek the permission of a court of law to seize the property. The Notice of Intent to Levy normally provides the property owner with 30 days to satisfy the tax lien before the property is legally taken.
About the Author - Tax Lien
Bill Sharlow is the Editor of Money-Zine.com. Copyright © 2004 - 2007 Money-Zine.com
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