Property taxes are a lien on the property from the moment they are assessed, and in many states that lien takes priority over mortgages. Unpaid property taxes must be paid or resolved at closing, and tax lien sales can transfer ownership interests that complicate any later transaction.
How Property Tax Liens Work
Local governments assess property taxes annually, and the unpaid amount becomes a lien on the property. The lien generally has priority over mortgages and other liens, which is why lenders require proof that current taxes are paid. The rules for assessment, collection, and enforcement vary by state and locality.
- The tax lien attaches when taxes go unpaid.
- Tax liens often have priority over mortgages.
- Enforcement rules vary by state and county.
What Happens at Closing
At closing, the title company verifies the current tax status and prorates the taxes between buyer and seller. Delinquent taxes are paid from the seller's proceeds, and the tax authority issues a receipt. The closing cannot proceed with an outstanding tax lien on the property.
- Tax proration divides the current year's taxes.
- Delinquent taxes are paid at closing.
- The tax authority confirms the account is current.
Tax Lien Sales
When taxes go unpaid long enough, the local government may sell the tax lien to an investor or hold a tax deed sale, depending on the state. A tax lien certificate gives the holder an interest in the property, and a tax deed can transfer ownership. These interests appear in the title record and must be addressed before a clean sale.
- Tax lien certificates are sold in many states.
- Tax deed sales transfer ownership interests.
- Redemption periods and rules vary by state.
Investors and Tax Liens
Some investors buy tax liens as an investment, and others buy properties that carry them. Either way, the title record is the map: it shows what liens exist, who holds them, and what must be paid. An investor buying a tax-lien property should understand the redemption rights and the priority of the lien.
- Check the title record for tax liens and certificates.
- Understand redemption periods before buying.
- Budget for the payoff in the acquisition cost.
The Bottom Line
Tax liens are among the most powerful claims against a property, and they are also among the most routine to resolve at closing when they are found in time. The title search finds them, and the closing pays them. The risk is in the details, which vary by state and county.
- Read the guide on liens and judgments for the general picture.
- Read the guide on title problems that delay closings.
- Request an exact title and escrow quote for your transaction.