Tax Liens - Where They Come From and Why They Exist

If you've been looking into the concept of tax liens as an investment opportunity, or you simply want to avoid having one leveled against your property, it's important to understand both where these methods come from and why they exist. If a homeowner fails to pay what they owe to the IRS, the agency has the right to issue a lien against the property. This simply means that they claim the right to the property until the debt is paid. It prevents the home from being sold, with the owner absconding with the money they owe. If enough time passes without the homeowner living up to their obligations, the IRS may seize the property and put it up for auction.

Categories

Tax liens come in several forms. One of the most common is the consensual variety, which is placed against the mortgage. Sometimes a statutory one is used, usually when there is an issue regarding federal taxes in addition to the local ones. The type that is used will have a part to play in how the homeowner is able to pay them back, who seizes the property should the terms of the debt not be satisfied, and how an auction proceeds should it come to that point.

Notification

The IRS sends out warnings in the mail when tax liens are about to be claimed. This gives the homeowner the chance to make their debt right before additional penalties can be incurred. If the issue is a federal one, the IRS will have the right to claim not only the relevant property, but any and all assets that could be used to pay down the debt. In a state level case, the government will only be able to make a claim against the property for which taxes are owed.

Seizure

Seizure can occur in a couple of ways. Instead of foreclosing on the property, the IRS may instead choose to sell the tax liens to bidding investors. This will not relieve the burden on the homeowner, but will instead transfer ownership of the debt to another party. The homeowner will then be responsible to pay their back taxes to this new holder of the debt. Failure to do so could still result in foreclosure at a later date. As an investment opportunity, buying the certificates (as opposed to the property) can be risky. The homeowner didn't pay the government, so there's no certainty that they will pay you. If they don't, it could take years to take ownership of the house. This is a long time for your money to be invested. Still, under the right circumstances it can be extremely profitable.