Sometimes, property taxes are paid through a mortgage escrow account that the lender sets up when a borrower takes out a home loan. With an escrow account, the borrower pays money to cover property taxes (and also typically homeowners’ insurance and possibly other items, like homeowners’ association dues), along with the principal and interest as part of the monthly payment.
When property taxes aren’t escrowed, a homeowner has to pay the taxes separately from the mortgage payment. If the homeowner doesn’t pay the taxes, one of the following will likely happen:
- the taxing authority will hold a tax deed sale to recoup the lost tax income, perhaps through a foreclosure process
- the taxing authority will sell the tax lien that it holds, and the purchaser might be able to foreclose (or ask the county to hold a tax sale to sell the property)
- the taxing authority will execute its lien by taking title to the home, or
- the mortgage lender might decide to pay the delinquent taxes and then bill the borrower for the expense.
How Property Taxes and Tax Liens Work
Owners of real property have to pay property taxes. The government uses the funds that property taxes generate to pay for schools, libraries, roads, parks, and the like. The amount of property taxes that a homeowner has to pay is normally based on the property's assessed value.
But if a homeowner doesn’t pay the property taxes owed, the delinquent amount becomes a lien on the property, often as of the first day of the year after the year when the tax was assessed. Generally, state law gives property tax liens priority over other liens, like mortgage liens, even if the other liens were recorded before the tax lien. Because a tax lien has priority, a tax sale eliminates other liens on the home, including any mortgages.
If property taxes go unpaid for a sufficiently long period of time, the taxing authority will likely hold a tax sale.
How Tax Sales Work
The two basic types of tax sales are tax deed sales and tax lien certificate sales.
What Is a Tax Deed Sale?
In a tax deed sale, the taxing authority sells the property to the highest bidder, often for the amount of unpaid taxes. The high bidder gets a deed (a tax deed) and is then the new owner of the home. Sometimes a foreclosure process is used. The taxing authority forecloses the property, usually by filing a lawsuit in court, before holding a tax sale.
Typically, before a tax sale, the taxing authority (usually the county) records a list in the land records naming the taxpayer, the property, as well as the amount of tax due. Often, the list is also published in a newspaper. The homeowner also usually gets a notice about an upcoming tax sale through the mail. Sometimes, a notice about the sale is posted publicly.
What Is a Tax Lien Certificate Sale?
In a tax lien certificate sale, the taxing authority sells the tax lien. The buyer then has the right to collect the tax debt, plus penalties and interest. If the homeowner doesn’t pay the delinquent amounts, the buyer may ordinarily get ownership of the property by foreclosing or following certain procedures, like asking the county to sell the property at a tax sale.
In Some Jurisdictions, However, No Sale Happens
In some places, the taxing authority doesn’t hold a sale at all if you're delinquent in paying the property taxes. Instead, the taxing authority executes its lien by taking title to the home, meaning ownership of the home goes directly to the taxing authority.
State law then usually provides a procedure so that the taxing authority may sell the home to a new owner.
Getting Your Home Back After a Tax Sale
In most cases, a homeowner who loses their property to a tax sale may redeem the home within a specific time period after the sale by paying the buyer the amount paid at the sale, plus certain other costs and interest, or paying the taxes owed, plus interest.
If only the lien was sold, you can usually pay off the debt before the lienholder forecloses or take other required steps to keep the home.
How Long Is the Redemption Period?
The length of the redemption period after a sale varies from state to state. And, in some states, the homeowner’s right to redeem (by getting current on the taxes) happens before the sale.
Besides redeeming, another option for reclaiming the property is to ask a court to set aside (invalidate) the tax sale. Courts sometimes set aside sales in cases where, for example, an error occurred either in the sale process or in the imposition of the tax.
Invalidating a Tax Sale
Getting Help
Tax sale procedures vary widely from place to place. If you’re behind in paying your property taxes and facing a potential tax sale—or if a tax sale has already happened—consider talking to a real estate lawyer, tax lawyer, or foreclosure lawyer who can tell you about your rights and what options you might have to avoid losing your home.