Just What is a Tax Lien? The Basics

    A tax lien, just as any other lien, is a security interest granted over someone’s property to ensure payment on an obligation is made.

Local cities and counties all rely on property taxes to fund their police and fire departments, parks, and vital government services for the general public. They use their legislative powers to ensure taxes are paid once, twice or even four times a year on all property they deem taxable – most land, houses, and even personal property. If those taxes are not paid when due, the local jurisdiction creates a tax lien on the property that carries rights to enforce payment through foreclosure or other means.

These tax liens can then be sold to private investors who will have the same rights to enforce payment as the local jurisdiction.

These tax liens have many different names depending on the state—tax certificate, certificate of sale, certificate of delinquency, tax claim, and so forth.

For those familiar with real estate, you’ll know that liens on real property such as mortgages, judgments, and mechanic’s liens have priority over one another depending on when those instruments are recorded in the public record. Thus, if a property owner fails to make his or her obligations and the property is forced to be sold, the first recorded, valid lien will get paid. Then, the next lien in chronological order will be paid until all of the obligations are paid or the money runs out.

Tax liens are a different animal.

Since property taxes are mandated by the government, they hold priority over just about every other lien no matter when it is due. These tax liens will get paid before mortgages and judgments – even paid before most federal liens! There are exceptions that vary by state—certain environmental liens, bankruptcy fees, estate legal fees. And, there could be other lien holders and taxes owed on the property.

In general, the newer the taxes are, the higher priority they would have. Some states don’t sell these tax liens at all. They have chosen to hold the liens themselves without selling those rights to investors.

In this case, the taxing authority relies on selling the property themselves if the property taxes are not paid after a set period of time. When they sell the property, they sell the property at auction to the public via a tax deed.

So, what can you do if you own a tax lien? Not much--that is, however, until the taxpayer’s redemption period expires. All property owners are given a certain period of time (redemption period) to pay their property taxes once a tax lien is issued. This is anywhere from a few months to three years depending on the state.

Once the redemption period expires, the tax lien holder is allowed certain rights to begin foreclosure on the property that may result in a tax deed being issued to the holder of the tax lien.