Property taxes are often paid through an escrow account that the mortgage lender establishes. The borrower then must pay additional funds for property taxes, as well as homeowners' insurance and homeowners' association fees in some cases, to the lender along with the principal and interest as part of the monthly payment.
If an escrow account isn't set up, the homeowner is supposed to pay the property taxes separately from the mortgage. But when faced with economic difficulties, homeowners sometimes don't pay their property taxes. What happens when a homeowner becomes delinquent on the property taxes? Read on to find out.
All states have statutes that permit counties to place a lien on a property once the homeowner becomes delinquent on the property taxes. Under most state laws, property tax liens are granted first-lien status and are superior over other liens, including mortgages, regardless of whether the mortgage was recorded before or after the tax lien.
Once the property taxes are delinquent for a sufficiently long time, the taxing authority will typically initiate a tax sale. Generally, a list is recorded in the county records that names the taxpayer, the property, as well as the amount of tax due, and the list will often be published. The taxpayer will receive some form of notice of the tax sale, but in most jurisdictions no judicial action is required.
In some jurisdictions, the property itself is sold at the tax sale to the highest bidder. In other states, the purchaser does not buy the property itself but receives a certificate of purchase; once the redemption period expires, the purchaser obtains title to the property. Other jurisdictions sell tax certificates that allow the holder of the certificate to foreclose the tax lien. And in other places, the taxing authority simply executes its lien by taking the property.
There are several ways to prevent a tax sale of property, other than just paying off the full amount of the delinquent taxes. It is possible to:
State and local law usually provide a procedure for a homeowner to challenge the amount of a tax assessment and reduce the tax liability. There are mainly two grounds to contest an assessment. First, the taxpayer can assert that the assessment exceeds the property’s taxable value, meaning its value has been assessed incorrectly. Second, the taxpayer can argue that the property has been disproportionately assessed, meaning that the assessment is higher than assessments of comparable properties in the area. Once the assessment has been reduced, the homeowner might have an easier time paying off the property tax debt.
Each state has exemptions and abatements that reduce at least a portion of the tax liability for some taxpayers. For example, tax liability might be reduced due to a taxpayer’s age, disability, income level, or personal status (such as the surviving spouse of a firefighter or police officer). Some states will also defer property taxes if the taxpayer proves they suffered a financial hardship. However, a deferral might not be available once the taxes have become delinquent. Alternatively, a defaulting taxpayer might be able to negotiate a lower liability with the taxing authority. The taxing authority could agree to waive penalties and interest or give the taxpayer additional time to pay off the delinquency.
After a tax sale happens, the homeowner might be able to redeem the property. Redemption is the right of the property owner to reclaim the property by paying the entire sale price, plus certain additional costs and interest, after the sale so long as it is within the time period allowed by statute. Generally, the purchaser at the tax sale acquires its interest in the property subject to redemption by the former owner. If the taxpayer does not redeem within the prescribed time period, then the purchaser acquires clear title to the property. (To learn more about ways to save your home after a tax sale, read Nolo's article What Happens If My Home Goes to a Tax Sale?)
Usually, a property won't go to tax sale if there is a mortgage outstanding on the home. This is because the lender or servicer will often advance amounts to pay the property taxes to ensure that their lien is not wiped out in a tax sale. Most mortgages contain a clause that allows the lender to then add these advanced amounts to the total debt that the borrower owes.
The process for a tax sale varies from state to state. If you're facing a tax sale, consider consulting with a competent attorney who can advise you of your rights as well as actions that can be taken to prevent the loss of your property.