Can Property Be Foreclosed on by the State if Property Taxes Are Not Paid?

Foreclosure is a real risk if you don't keep current with your property taxes. The only question becomes exactly who might foreclose on you and how long it might take. This varies depending on state law, and the amount of time you have to save the situation can change from state to state as well. The good news is that foreclosure is typically a last resort by your municipal or county tax authority. They want your taxes, not your property.

Tax Lien Certificates

Many states don't foreclose on your property themselves. They sell the right to foreclose to investors instead. If you don't pay your property taxes within a period of time set by your state's laws, the taxing authority – usually your county or municipal government – will hold an auction and give bidders the right to purchase a tax lien certificate for your property. The certificate is a just a lien – it doesn't transfer ownership of your real estate. In exchange for the lien, the winning bidder pays your property taxes. This lien typically has priority over all others, including your first or second mortgage.

The Next Step

If your state allows the sale of tax lien certificates for delinquent property taxes, you usually have a period of time after the sale of the certificate – approximately one to three years – to redeem the lien. This involves compensating the winner bidder for the taxes he paid, plus interest set by your state's laws. If the redemption period expires and you do nothing, the winning bidder has the right to begin a foreclosure lawsuit against you to take possession of your property. Some tax authorities, such as certain counties in Ohio, allow for payment plans if you act quickly enough so you won't have to pay the whole thing in one lump sum.

Tax Authority Foreclosures

Some states bypass the tax lien certificate phase of the foreclosure process. For example, Washington law allows the tax authority to foreclose on your house itself if you fail to pay your property taxes for three years. This also happens through an auction, but the winning bidder actually receives a deed to your property, not just a lien that requires him to go through another step if he wants to foreclose. States such as New Hampshire skip even this step. If you don't pay your property taxes for 18 months, the tax authority can deed your property to the municipality.

Effect on Mortgages

Unless you own your home outright, you have a mortgage lender who doesn't want to see any of this happen. If you lose your property to foreclosure, your lender is out the money it gave you to purchase your property, because tax liens take precedence over lenders' liens. In tax lien certificate states, the foreclosure action extinguishes mortgages. In states that proceed directly to foreclosure, the same thing occurs. Most mortgage lenders require that you make escrow payments with them to provide for your taxes for just this reason – they want to make sure the tax authority is receiving its money. Tax lien certificate states allow your mortgage lender to bid on the lien to avoid someone else foreclosing, or to redeem the certificate itself during the redemption period. You'll still owe the taxes, but you'll owe your lender, not the government – and the lender can foreclose on you for nonpayment as well.

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