Real Estate Tax and Other Liens

Liens

Statutory and Equitable Liens

  • Liens: Claims against a property to ensure debt payment. They stay with the property, not the owner.
  • Security/Collateral: Something of value a borrower offers if they can't repay a debt.
  • Mortgage Lien: Security interest when real estate secures a loan.
  • Liens are not ownership but an encumbrance.
  • Encumbrance: Claim affecting property value or use; transfers with the property.
  • Liens are financial encumbrances due to debt, unlike physical encumbrances like easements.
  • Lienholders can foreclose if a lien isn't paid, using sale proceeds for the debt. Any remaining funds go to the debtor.

Types of Liens

  • Liens are classified by property type and creation.
  • General Liens: Affect all property (real and personal).
    • Examples: Judgments, estate/inheritance taxes, deceased debts, corporate franchise taxes, IRS taxes.
    • With general liens, everything can be seized to cover the debt (house, car, bank account, etc.)
  • Specific Liens: Secured by specific property.
    • Examples: Vendor's liens, mechanic's liens, mortgage liens, real estate tax liens, special assessments, utility liens (water/sewer).
    • Property tax lien example: if you don't pay property taxes, the lien is specifically against the house, not your car or bank account.
  • Vendor's Lien: Seller's claim for unpaid purchase price, common in owner financing.

Voluntary vs. Involuntary Liens

  • Voluntary Lien: Created intentionally by the property owner (e.g., a mortgage).
  • Involuntary Lien: Created by law, can be statutory or equitable.
    • Statutory Lien: Created by statute (law).
      • Example: Real estate tax lien; exists without property owner's action.
    • Equitable Lien: Arises from common law.
      • Example: Court-ordered judgment for debt payment; becomes an involuntary equitable lien.

Effect and Priority of Liens

  • Liens attach to the property, not the owner; new owners risk the property if debts aren't paid.
  • Liens run with the land until paid or cleared.
  • Priority of Liens: Order claims are paid if the property is sold.
    • Generally, first recorded = first in priority.
    • First lienholder foreclosing pays their lien first; remaining funds go to other lienholders.
    • Junior lienholders can foreclose, but the property remains subject to higher-priority liens.
  • Exceptions:
    • Real estate taxes and special assessments take priority over all other liens, regardless of recording date.
  • Subordination Agreements:
    • Written agreements to change lien priority.
    • A superior lienholder allows a later lienholder to take precedence.

Priority of Liens Order

  1. Mortgage Lien
  2. HELOC (Home Equity Line of Credit)
  3. IRS
  4. Mechanic's Lien
  5. Real Estate Taxes

Impact of Foreclosure on Lien Order

  • If the first lienholder forecloses, everyone gets paid in order of priority.
  • If a second lienholder forecloses, the purchaser is still subject to the first lien.
  • Real estate taxes take absolute priority; the IRS cannot supersede property taxes.

Real Estate Tax Liens

  • Two types:
    • General Real Estate Taxes
    • Special Assessments (Improvement Taxes)
  • Both are levied against specific properties and become automatic liens.
  • Government Powers = PEAT
    • Police Power
    • Eminent Domain
    • Taxation (Property Taxes)
    • Escheat
  • Real estate taxes have priority as the government can reliably collect them due to the fixed location of real estate.
  • Ad Valorem Tax: Latin for "according to value," based on property value.
  • Real estate property taxes are a stable revenue source for local government since real estate can't be hidden and is easy to value.
  • Property taxes fund:
    • State, county, city, town, borough, and village services
    • School districts through community colleges
    • Drainage, hospital, water, sanitary, and transportation districts
    • Parks, forest preserves, and recreation districts
  • Homeowners often pay taxes through mortgage escrows.

Exemptions from General Taxes

  • Tax-exempt properties:
    • City-owned properties (municipal organizations)
    • Schools, parks, playgrounds
    • State and federal government properties
    • Religious and charitable organizations (churches)
    • Educational institutions

Property Tax Relief Programs (Maryland Example)

  • Homestead Tax Credit Program:
    • Protects owner-occupied residences from rapid inflation effects on assessments.
    • Requires homeowners to submit a tax credit application.
  • Homeowner's Property Tax Credit Program (Circuit Breaker):
    • Caps residential property tax based on homeowner's net worth, annual income, and property value.
    • Also provides tax credits for renters meeting income and asset requirements with property values not exceeding 50,000; credits can be up to 750 a year.
  • Property Tax Deferral Program:
    • Allows property owners 65 or older to defer increases in their property tax.
    • The deferred tax becomes a lien on the property and must be repaid when the property is transferred.
  • Tax credits for:
    • Unsold or unrented single dwelling units.
    • Property damaged by natural disasters.
  • Residential property tax exemption:
    • For veterans with a permanent 100% service-connected disability.
    • The unremarried spouse of the deceased veteran retains this benefit.
  • Local Taxing Body Credit:
    • Local taxing bodies can authorize a tax credit of up to 20% of the local property tax for US armed forces.
  • Tax Reduction for Blind Individuals:
    • The assessment on a residence owned by a legally blind individual is reduced by 15%.
  • Transfer and Recordation Taxes:
    • State transfer tax = 0.5% of the sales price.
    • Local transfer tax = set by the county.
    • Local recordation taxes = also set by the county
    • These are split equally (50/50) between buyer and seller.

Assessment

  • Assessment = valuation of real estate for tax purposes by assessors or appraisers.
  • Assessed value = used to determine property taxes.
  • Land and building values are assessed separately.
  • Property owners can appeal assessments if they believe an error occurred.

Assessment Process (Maryland Example)

  • Triennial Assessment- a three-year cycle in which one-third of all properties are revalued each year.
  • Property revaluation notice sent to homeowners showing property's assessment for the next three years
  • Taxpayers may appeal within 45 days of receiving the notice.
  • Exterior inspections of premises part of each reassessment.
    *

Payment (Maryland Example)

  • Taxes on residential property paid in two equal installments.
  • First payment due July 1; can be paid as late as September 30 without penalty.
  • Second payment due January 1; can be paid as late as January 31 without penalty.
  • When property is sold, taxes are prorated for the given period

Equalization

  • In a few counties it may be necessary to correct inequalities in statewide tax assessment. In this instance
  • Assessment Equalization Factor: Corrects inequalities in statewide tax assessment creating uniformity.
  • The assessed value on each property area is multiplied by the equalization factor, and then the tax rate is applied to the equalized assessment.

Tax Rates

  • The process of arriving at a real estate tax rate begins with the adoption of a budget by each taxing district.
  • Second Step: Appropriation authorizing the expenditure of funds and providing the sources of the funds.
  • Third Step: Approval by the voters, the amount of the raised from the general real estate tax is imposed on a property owners through a tax levy.
  • A Tax Levy, is a formal action taken to impose a tax
  • The tax rate for each taxing body is determined by state law or computed separately.
  • Tax rate is calculated by dividing total money needed by total assessments of real estate within the jurisdiction.
  • Tax rates can be expressed in mills, dollars per hundred, or dollars per thousand.
  • Mill = one-thousandth of a dollar.

Tax Bill

  • Calculated by applying the tax rate to the assessed valuation of the property.

Tax Calculation Examples:

  • A property with a market value of 160,000 is assessed at 75% of market value. If the tax rate is 40 mills, calculate the annual real estate tax:
    • Assessed Value: 160,000 \times 0.75 = 120,000
    • Annual Real Estate Tax: 120,000 \times 0.04 = 4,800
  • A property valued is 135,000 assessed at 47,002.50 has an equalization factor of 125 and a tax rate of 25 mills. Calculate the annual real estate tax:
    • Equalized Assessed Value: 47,002.50 \times 1.25 = 59,062.50
    • Annual Real Estate Tax: 59,062.50 \times 0.025 = 1,476.56 = 1,477
  • A parcel of vacant land has an assessed valuation of 274,550. If the assessment is 85\% of market value, calculate the market value:
    • Equilization Value: 274,550 / 0.85 = 323,000

Enforcement of the Tax Lien

  • Real estate taxes must be valid to be enforceable.
  • Tax liens usually have priority over all other liens.
  • Delinquent taxes are collected through a tax sale of the property.
  • Tax sales involve published notice, court judgment, and public sale.
  • A certificate of sale is given to the highest bidder, granting possession rights.
  • Some states have a redemption period for the defaulted owner to redeem the property by paying the amount collected at the tax sale plus interest and charges.
  • In some states, the delinquent taxpayer can redeem the property anytime before the tax sale by paying delinquent taxes, interest, and charges.

Ad Valorem Tax Delinquency and Redemption (Maryland)

  • Taxes not paid by December 30 (or January 31) are considered delinquent.
  • Unpaid taxes create a priority first lien on the property.
  • After a tax sale, there is a six-month statutory period of redemption.
  • The delinquent taxpayer can redeem the property by paying the delinquent tax plus interest, penalties, and legal fees.
  • Vacant, uninhabitable properties may have expedited tax sales.
  • There is a three-year statute of limitations for tax lien actions.
    Special Assessments.

Special Assessments and Local Improvement District Taxes

  • A special assessment = tax on real estate to fund public improvements, creating a lien.
  • Property owners in the improvement area pay because of the direct benefits of their properties.
  • Special assessments are paid in equal yearly installments over a period of years, including interest.
  • Property owners can prepay installments to avoid future interest charges.

Liens on Real Estate (Other Types)

  • Mortgage Lien:
    • Voluntarily obtained when taking out a mortgage.
  • Mechanic's Lien:
    • Specific, involuntary lien for labor or materials to improve real property.
    • Available to contractors, subcontractors, equipment lessors, surveyors, laborers, and other providers.
    • Filed when the owner has not fully paid for the work.
  • Judgment:
    • A decree issued by a court. it's a general involuntary equitable lien on both real and personal property.
    • Results from damages, breach of contract, or nonpayment of debt.
    • A lien automatically covers only property located in the county where the judgment was issued.
    • Enforced through a writ of execution = court order directing the sheriff to seize and sell property to pay the debt.
      • When the creditor wants the money they need to go back to court and get a writ of execution. That will allow the sheriff to start the process of selling that person's real estate or personal property to pay that judgment.
  • Lis Pendens:
    • Notice of pending litigation affecting title to or possession of real estate.
    • It is not a lien but notifies prospective buyers and lenders of a potential claim against the property.
    • Establishes priority for a later lien/claim.
  • Attachment:
    • Prevents a debtor from conveying title to previously unsecured real estate while a lawsuit is being decided.
    • A writ of attachment = a court order directing the sheriff to seize and take control of the property.
    • Most attachments arise from an action for payment of an unsecured debt.
  • Estate and Inheritance Taxes:
    • Federal estate and state inherited taxes = general statutory involuntary liens on a deceased person's property.
  • Liens for Municipal Utility Bills:
    • Liens will be imposed when a utility bill is not paid.
    • Federal Tax Lien (IRS):
      Results from failure to pay federal taxes.
      It's a general statutory involuntary lien on all real and personal property held by the taxpayer.
      Its priority is based on the filing date and does not supersede previously recorded liens.