Definition of a State Tax Lien
by Andy Pasquesi
Given the struggling housing market and global economic turmoil of late, you have probably heard the term "tax lien" cropping up in the news. Despite their far-reaching consequences, tax liens are actually pretty difficult to understand without a working knowledge of real estate law and state tax code. Understanding these major issues can provide a useful context within which to better grasp the idea of state tax liens.
What Is a State Tax Lien?
Tax revenues are the lifeblood of a governing body. They allow lawmakers to fund the public projects (e.g., roads, sanitation, law enforcement, schools, postal carriers, emergency services, armed forces) essential to the safety and continued prosperity of citizens. A "tax lien" is one of the tools states use to make sure that collected tax revenues match the revenues projected in the annual budget.
When you don't pay your state taxes, the state is authorized to put a tax lien on your property--a legal action that basically transforms the amount you owe into a loan, with your house as collateral. And, like a loan, the tax lien charges interest on the amount owed and features a repayment schedule. If you default, the state gets your house.
State Tax Liens vs. Property Tax Liens
Tax liens are most commonly used on delinquent property taxes (a.k.a. "escrow"). Property taxes, however, are generally levied by local municipal governments, not the state. Most states issue a sales tax, estate/inheritance tax or income tax. As such, state tax liens typically apply to individual proprietors or businesses who have failed to pay the lump-sum sales tax amount (which is a fraction of their annual gross revenue) to the state. If the party actually owns its place of business, the lien will generally be put on this property (as opposed to the party's residence). If the business only leases this property, then the lien will be put on any other private property owned, including the home of the proprietor.
How To Remove a Tax Lien: Pay It Back
Paying back the lien is the easiest way get released from it. Tax liens can really hurt your credit score, though, so time is of the essence. Talk to an attorney specializing in tax law; he can help tremendously by negotiating lower interest rates and smaller monthly payments. You should probably also contact an accountant, since state tax liens are often a sign of larger financial problems.
How To Remove a Tax Lien: Use The "Homestead Act"
Certain states have a law known as the Homestead Act. Under this law, the elderly and/or disabled cannot have a tax lien put on their primary residence. The state will pursue other avenues to collect the taxes, but these avenues will not result in home foreclosure.
How To Remove a Tax Lien: Sell the Property
If you sell the property, you can apply to the state for a "Certificate of Release" from the tax lien on it. That said, this simply removes the lien from that specific property. If you don't use the proceeds to pay off the amount you owe, however, the state can put a lien on property you own in the future.
How To Profit from Tax Liens
Because tax liens charge interest, states will often sell them to private investors. From the state's perspective, this allows for a timely collection of taxes in full. From the investor's perspective, buying a tax lien has all the advantages of buying a state-issued bond (i.e., guaranteed interest), with the added possibility of winning the underlying property if the owner defaults on repayment.
Tax liens are sold to the private sector through public auctions. Unfortunately, auctions are "site-unseen," meaning that aside from basic information (acreage, square-footage, rooms, address), investors don't get to inspect the condition of the building or the land until after it is purchased.