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What You Should Know about Tax Liens and Sales for the Real Estate License Exam

Here are a couple of points you specifically must know about tax liens for the Real Estate License Exam. Individual state laws dictate the details of what happens when real estate taxes go unpaid. You’re unlikely to get questions that deal with that level of detail. A number of practices are commonplace, however, you still should check out the details in your home state.

If you don’t pay your taxes, eventually the taxing authority (call it the city) can take legal action to collect them from you. The first action taken generally is the placement of a lien against the property for the unpaid taxes. A lien is a financial obligation attached to a piece of property. After that, other legal action may take place that can take one of two forms.

  • Tax sale: One way for the city to collect the money you owe in taxes is to conduct a tax sale. The city sells your tax debt to someone. That person pays the city what you owe. If you don’t pay that person back, usually including some kind of interest or penalty, that person can claim ownership of the property.

    Before and during this action, the property owner has a right to redeem the property by paying the taxes plus any penalties or interest that apply. The right to do this before the tax sale is known as the equitable right of redemption. The right to do this after the tax sale is called the statutory right of redemption.

    The details of how these redemptions work are governed by individual state law. You can remember these two terms by the fact that “e” for equitable is near the front of the alphabet and the equitable right of redemption is before the sale, and that “s” for statutory is near the end of the alphabet and the statutory right of redemption is after the sale.

  • Foreclosure: Another way the city can collect unpaid taxes is by foreclosing on the property, which means taking ownership of it and selling it to pay for the unpaid taxes. A term associated with foreclosure for unpaid taxes is in rem. In rem means the city takes action against the property rather than against you.

Banks that lend money for mortgages are particularly concerned about tax liens, because a tax lien takes first priority, which means it must be paid before any other liens, including the mortgage. The mortgage lender therefore is concerned that if a property must be sold for unpaid taxes, not enough money will be left from the sale to pay the balance owed on the mortgage loan.

That’s the reason many banks require the homeowner to pay into a tax escrow account from which the bank pays the taxes, just to be sure they get paid.

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