What happens when you have a tax lien on your property

Tax lien investing is a type of real estate investing where individuals purchase tax lien certificates. These certificates are created when local governments place liens on people’s property due to unpaid taxes. There are 28 states that currently allow for the sale of tax lien certificates. Since there are approximately $21 billion of delinquent property taxes each year, it’s a booming business.

Wondering how to invest in tax liens? Tax lien investing is quite different from the traditional stock market or bond investing, so it’s important to understand what you’re getting yourself into.

1. The Local Municipality Creates A Tax Lien Certificate

Local governments charge property taxes to help fund government programs and services. If a homeowner fails to pay their property tax bill, the local government places a lien and creates a tax lien certificate. This certificate includes information such as the amount of tax due, as well as any interest or penalties.

If the property owner still doesn’t pay their tax bill (with interest), then the government has the right to foreclose on the home.

2. The Tax Lien Certificate Is Put Up For Auction

In 28 states, the government can sell tax lien certificates to private investors, which allows them to recoup their losses more quickly. This sale usually happens at a tax lien auction, where the certificate goes to the best bidder.

3. Investors Bid On The Tax Lien Certificate

Depending on the auction, bids may be based on either the cash amount someone is willing to pay for the certificate or the interest rate they’re willing to accept. In the case of cash offers, a certificate goes to the highest bidder. In the case of interest rate, it goes to the lowest bidder.

Keep in mind that the lower the interest rate you bid on a tax lien certificate, the lower the profit you could potentially receive. Bidding wars on tax liens can drive the interest rate – and therefore the profit – down.

4. Winning Investor Takes Control Of The Property

The winning bidder of a tax lien auction takes ownership of the tax lien certificate. This doesn’t technically give them ownership of the property. But it gives them the right to take ownership of the property through foreclosure or be paid back when the homeowner eventually pays their tax bill.

5. Investor Pays The Amount Of Taxes Owed

When you win a tax lien auction, you’re immediately responsible for paying the tax bill, including any interest or fees owed. Then, the homeowner has a certain period of time before the redemption period deadline, by which time they must pay the new investor or risk foreclosure.

6. Repayment Or Foreclosure

When you purchase a tax lien certificate, there are two potential outcomes: either the homeowner will pay their property taxes, or they won’t. If the homeowner pays their property taxes, then you make back your initial investment, plus the interest rate you bid at the auction.

If the homeowner doesn’t pay their property taxes, then you have the right to begin the foreclosure process. Depending on the state, there may be an expiration date, which requires you to initiate foreclosure within a certain amount of time after buying the tax lien. If you fail to take action, you may lose your right to collect your investment.

It’s important to note that it’s quite rare for the situation to get that far. The majority of homeowners pay their tax bills before the foreclosure process begins.

It’s a nightmare none of us want to find ourselves in, but when you are in deep with the IRS and have payments past due, it is likely that the IRS will put a tax lien on your home. A tax lien often puts us in a difficult situation as it makes it harder to sell our home or even to refinance and take out a second mortgage.

When will the IRS consider a lien on my house?

Often, the IRS will take this action when you owe more than $5,000 and they don’t think you will be able to pay in the given time, which is 10 years. By putting the tax lien on your property, the IRS is ensuring they will receive some form of payment from you at some point, even if you are unable to pay back the debt you are in within the statute of limitations.

Can the IRS take my home?

Many people receive a tax lien from the IRS and immediately think they are getting their home taken from them. This is not the case. By issuing a tax lien, the IRS is simply ensuring they receive a portion, or the whole, of your home sale, when and should you want to sell it. They in no way can force you to sell your home or to refinance. Unfortunately, this tax lien is public knowledge and can make it much more difficult for you to sell the home or to refinance as it will be placed on your credit. In fact, even after the lien is paid, you may still find it difficult to sell, buy or refinance a home as the lien will stay on your credit for seven years after it is paid off.

There are options for removing the lien from your credit after it is paid and an experienced tax attorney will be able to walk you through your options and help you fix your credit.

How can I get rid of the tax lien?

By law, the IRS is not allowed to put a lien on your home until they have sent out prior warning and the opportunity to pay the tax debt. Unfortunately, that warning usually only gives the taxpayer 10 days to come up with the money and pay their tax debt back in full. For those that are unable to do this, you do have a few other options.

• Sell your home: While it may not be ideal, sometimes the easiest way to release the lien is to sell your property. If you have enough equity in the home to pay off the tax debt, then the sale of the home will go to the IRS and you will be released of your lean. If you do not have enough equity, selling is still a good option: the IRS will often accept a partial payment and release the lien by using other assets to pay your debt.
• Request an installment plan: An installment plan is a payment plan that you can enter into with the IRS to pay off your debt. If you are able to make the monthly payments and have less than $50,000 in debt, the IRS will release the lien after the first three payments are made.
• Lien subordination: If you do not want to, or cannot, sell your home, you can consider a refinance. While it may be difficult to qualify for a refinance, if you do, you can let the IRS know that the money you saved from your refinance will go towards your tax debt and they will likely release the lien.

If you are in major tax debt and worried that you may soon receive a tax lien on your home, or have already received one, contact the experienced tax professionals at Levy & Associates. Contact us at 1-800-TAX-LEVY or visit our website to learn more.

Contact Levy & Associates for Dependable Tax Audit Services

Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.

There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.

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