“What is Tax lien”
By James Nsien2
http://james-nsien2.com
A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of the lien is referred to as the lienee.
In the United States, the term lien generally refers to a wide range of encumbrances and would include other forms of mortgage or charge. In the U.S., a lien characteristically refers to non-possessory security interests.
In other common law countries, the term lien refers to a very specific type of security interest, being a passive right to retain (but not sell) property until the debt or other obligation is discharged. In contrast to the usage of the term in the U.S., in other countries it refers to a purely possessory form of security interest; indeed, when possession of the property is lost, the lien is released. However, common law countries also recognize a slightly anomalous form of security interest called an “equitable lien” which arises in certain rare instances.
Liens in United States:
Liens can be consensual or non-consensual (also termed voluntary or involuntary in different states). Consensual liens are imposed by a contract between the creditor and the debtor. These liens include:
• mortgages;
• car loans;
• security interests;
• chattel mortgages;
• property improvements (mechanic’s lien)
Non-consensual liens typically arise by statute or by the operation of the common law. These laws give a creditor the right to impose a lien on an item of real property or a chattel by the existence of the relationship of creditor and debtor. These liens include:
• tax liens, imposed to secure payment of a tax;
• “weed liens” and “demolition liens”, assessed by the government to rectify a property from being a nuisance and public hazard;
• attorney’s liens, against funds and documents to secure payment of fees;
• mechanic’s liens, which secure payment for work done on property or land;
• judgment liens, imposed to secure payment of a judgment
• maritime liens, imposed on ships by admiralty law.
Equitable lien (U.S.):
In the United States, references to an “equitable lien” is a right, enforceable only in equity, to have a demand satisfied out of a particular fund or specific property without having possession of the fund or property. In U.S. law, such liens characteristically arise in four circumstances:
1. when an occupant of land, believing in good faith to be the owner of the land, makes improvements, repairs or other expenditure that permanently increases the land’s value;
2. when one of two or more joint owners makes expenditures of the kind described above;
3. when a tenant for life completes permanent and beneficial improvements to the estate begun earlier by the testator; and
4. when land or other property is transferred subject to the payment of debts, legacies, portions or annuities to third persons.
What is a Tax Lien?
A tax lien is a lien imposed on property by law to secure payment of taxes. Tax liens may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes.
In most jurisdictions, when a property owner is late on paying real property taxes, the county or municipality will issue a tax lien on that person’s property. Certain states allow the tax lien to become a first lien on the property, which is then turned around and sold at auction as a tax lien certificate.
After placing a successful bid, buyers of a government-issued tax lien certificate will then get one of two things:
1) A state-mandated yield from the lien, which the delinquent taxpayer must pay in order to release the lien, OR
2) Title to the property (after a certain amount of time, set by the jurisdiction) if the delinquent taxpayer fails to pay up.
Tax liens in connection with property taxes:
Unlike personal debts, tax liens on real estate “run with the land”; that is, a property owner becomes responsible for payment even if the tax obligation was incurred by a prior owner. Depending on the law of the state or jurisdiction, the owner of the property may also be personally liable for payment of the taxes.
Payment of a tax lien may occur through various methods:
• Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage company will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
• If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
• Procedures vary from state to state. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings Federal tax lien in the United States
In the United States, the federal tax lien may arise in connection with any kind of federal tax, including but not limited to income tax, gift tax, or estate tax.
Certificate of release of federal tax lien
In order to have the record of a lien released a taxpayer must obtain a Certificate of Release of Federal Tax Lien. Generally, the IRS will not issue a certificate of release of lien until the tax has either been paid in full or the IRS no longer has a legal interest in collecting the tax. The IRS has standardized procedures for lien releases, discharges and subordination. In situations that qualify for the removal of a lien, the IRS will generally remove the lien within 30 days and the taxpayer may receive a copy of the Certificate of Release of Federal Tax Lien. The current form of the Notice of Federal Tax Lien utilized by the IRS contains a provision that provides that the NFTL is released by its own terms at the conclusion of the statute of limitations period described above provided that the NFTL has not been refilled by the date indicated on the form. The effect of this provision is that the NFTL operates as a Certificate of Release of Federal Tax Lien on the day after the date indicated in the form by its own terms.
What is a Tax Lien Certificate?
A tax lien certificate is nothing more than a lien on a property for not paying taxes. Essentially, each and every year owners of real estate have a tax lien (aka financial obligation to pay taxes) placed on their real estate. If the property taxes are paid on time the tax lien is removed. If they are not paid, in due time the county government will allow investors to pay on behalf of the real estate owner. The winning bidder at the public tax lien auction receives a tax lien certificate as proof of purchase. As the owner of the tax lien certificate the investor may expect one of two possible outcomes, 1) An annualized return of 16%, 18%, up to 50% per year on what they paid to obtain the tax lien certificate or 2) Through foreclosure, become the owner of the real estate free and clear of any junior liens (aka mortgages and mechanics liens).
Once you become the owner of the tax lien certificate all you must do is sit back and wait. When the property owner finally decides to pay his tax obligation he / she must pay a visit to the county tax collectors office where he/she will repay what you paid to acquire that tax lien certificate plus interest. At this point the government will contact you, ask you to return the tax lien certificate and upon receipt of the tax lien certificate the government will generate a check in the amount you paid to acquire the tax lien certificate plus interest.
Tax Deed Sale Process
Real estate taxes are considered delinquent if not paid within a specified period of time. If the taxes are not paid, after legal requirements are met (such as giving proper notice to the property owner as well as others holding an interest in the property, or by filing required action in the courts), the property is offered for sale at a public auction. Before the property is offered for sale at auction, Jurisdictions such as Florida sell a Tax Lien Certificate on the property. A Tax Lien represents a lien of unpaid real estate taxes, assessments, including penalties, advertising costs and fees. If the property owner fails to pay the delinquent taxes during a specified period of time, the county government can sell what is called a Tax Lien Certificate on the property. The Tax Lien Certificate represents the outstanding taxes on the property. Many county governments sell the Tax Lien Certificates to investors so that the county may recoup the delinquent taxes. In exchange for the purchase, county governments offer the investors interest on those Tax Lien Certificates and the guarantee that those Tax Lien Certificates will be paid off within a predetermined period of time. Interest accrues on the Tax Lien Certificate over a specified course of time until the taxes are paid. A Tax Lien Certificate is a first position lien (Senior Lien) on the property. In most states, if the property owner does not redeem the Tax Lien Certificate within a specified time period the holder of the certificate can ask the county government to begin procedures to auction the property to the public. Proceeds from the auction will pay off the Tax Lien Certificate Holder.
The minimum bid is generally the amount of back taxes owed plus interest, as well as costs associated with selling the property. Bidding is done in increments from $10-$100 in most states. In the event the property is not purchased, title may revert to the government if a Tax Lien Certificate was not sold on the property. The government may then attempt to sell the property at a public auction and/or offer it for sale in a private transaction. If a Tax Lien Certificate was sold on the property, states like Florida will offer the property to the Tax Lien Certificate Holder. In that case the Tax Lien Certificate Holder will receive title to the property.
In most cases, the jurisdiction will only provide a quitclaim deed at the sale, which is usually insufficient for title insurance. Therefore, a “quiet title” action must be filed in court to obtain an insurable title.
James Nsien2
NCN Real Estate Investments, LLC
Originally posted 2009-04-04 15:36:23. Republished by Blog Post Promoter