What is a Tax Foreclosure Lien?

R. Anacan
R. Anacan
Foreclosure may result from failing to pay property taxes.
Foreclosure may result from failing to pay property taxes.

A tax foreclosure lien is a term that is used to describe a property that has been foreclosed on due to non-payment of taxes on the property. A foreclosure is the legal process in which the holder of a lien on a property forces the sale of the property for the purpose of generating revenue from the sale of the property. A lien is the interest that one party places on real estate property that gives the lien holder the right to restrict the sale of the property that the lien is placed on and also gives the lien holder the first right to proceeds from the sale of the property.

Examples of parties that commonly place liens on real estate property are mortgage lenders, who place the lien on the property as security that the debt will be repaid, and government entities to ensure that any unpaid taxes are repaid. An interesting aspect of a tax foreclosure lien is that the foreclosure process is not always initiated by the government entity that is owed taxes by the property owner. In many areas, the actual tax lien certificate on a property is sold by the government to investors. This provides income to the government along with an investment opportunity for the purchaser.

Once the auction is complete the highest bidder may then possess all of the rights of the senior lien holder on a property. This is because in many areas, a tax lien is considered to have more priority than any other liens placed on a property, including real estate mortgages. Once a tax lien certificate is purchased, the purchaser then has the right to collect the unpaid taxes and any applicable interest that are owed on the property from the debtor. At the very least, an investor who purchases a certificate for a tax foreclosure lien may earn a return on the original investment, since tax lien certificates are generally purchased at auction for less than the total amount of taxes that are due. The difference between what the lien holder paid to the government for the right to the lien and what the lien holder collects from the debtor, in addition to any applicable interest, is the investor's profit.

If the back taxes are not paid within a specified period of time, the tax lien holder has the right to begin the foreclosure process in an attempt to collect the back taxes that are due. Most homes sold in foreclosure are sold at auction to the highest bidder. The holder of the tax lien then profits, at the very least, by having the first rights to any revenue generated from the sale of the home, up to the amount of back taxes and interest that are owed. The person who initiated the tax foreclosure lien process also has the right to bid on the property during the auction.

Holding a tax lien certificate may also give the lien holder the ability to, in effect, purchase a home for a fraction of the property value. This is because, in some areas, the lien holder may have the right to acquire possession of the real estate outright by simply and only paying the back taxes that are owed, even if there is an existing mortgage on the property. In fact, this is a major reason that interest in tax lien certificates has grown in recent years.

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    • Foreclosure may result from failing to pay property taxes.
      Foreclosure may result from failing to pay property taxes.