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What is a Tax Lien

What is a Tax Lien

If you are curious about what is a tax lien and what are the legal implications of having a tax lien imposed on a property, this article will be a helpful read.
Omkar Phatak
Paying your taxes on time is always the best policy to follow. There are a range of taxes that you need to pay in USA, which primarily includes income tax and property taxes. An individual who fails to pay property taxes invites a federal tax lien which may lead to seizing of his property by the government to recover the tax debt.

What is a Lien?

It would be instructive to first understand what is a 'Lien', before talking about what exactly is a tax lien. According to federal law, a lien is a particular type of security interest, that is provided to a creditor by a property owner who owes him money. In the event of non-payment of the debt by the owner, the lien permits the creditor to sell the property to recover his losses. A legal terminology, a lien is a type of 'Encumbrance', which is any kind of legal hold on the property which limits its title.

What is a Tax Lien?

A federal tax lien is a legal right on a property, which is granted to the government due to defaulted payment of property taxes by the owner. This right allows the government to seize the property and sell it through auctions, in case the owner fails to pay up the tax debt entirely. The administration of liens and recovery of tax debt is handled by the Internal Revenue Services (IRS). Even if the tax debt was accrued by a previous owner, the current owner is liable to pay the tax debt and may have a tax lien imposed on the property, in the event of non payment. One could say, that the tax lien is connected with the property, irrespective of who owns it.

In case the tax debt is not paid off, the local county government issues tax lien certificates. A buyer of such a certificate, who pays the amount of tax debt, is paid a fixed percentage of annual returns as interest over his investment. In case of failure of payment, by the original owners the certificate owner may end up being the owner of the property through foreclosure.

Not only does an unpaid lien lead to loss of property, it also downgrades the credit score of the owner, which leads to further financial difficulties. Moral of the story; taxes are inevitable and they must be paid on time to continue living peacefully!

When buying a new property, it's essential that you check out if that property has any tax liens imposed upon it, which can create a huge liability for you as a new owner. It's essential that you give top priority to the payment of property tax as a federal tax lien imposed on any property can drastically affect your credit score rating. This can make it difficult for you to secure loans in the future. Failure to pay off the tax debt and continuing of the lien imposition may ultimately lead to a seizure and sale of the property to recover the taxes.

As explained before, this creates opportunity for investors who can buy tax lien certificates through sales and auctions conducted by the federal government, as a pure monetary investment with fixed returns. These tax lien buyers can eventually end up acquiring the property through a foreclosure, if the previous owner fails to pay off the taxes.