If you own real estate, you have to pay property taxes to either your city or your county, depending on the state in which you live. Property taxes are taxes you pay based upon the value of the property, and your local government will use those taxes to take care of its operating expenses and also fund schools and local services. If you don't pay your property taxes on time, the government can charge you interest and penalties, and gets a lien on your property. A property tax lien can result in the government taking your house and selling it.
If you owe back property taxes, the taxing authority gets a lien on your house for the amount due plus any interest and penalties. If you try to sell your house, you'll need to pay the lien before you can close on the sale, and if you don't pay the taxes for too long, the taxing authority can sell your house out from under you.
How Are Property Taxes Assessed?
Property taxes in most states are assessed either by the city or the county. The amount you pay is based on the value of your house and the land it sits on. The taxing authority, whether it's the city or the county, will determine a taxable value for your real estate and tax you accordingly. For example, if your city decides that your house has an assessed value of $100,000 and the land has an assessed value of $50,000, your total assessed value is $150,000, and the tax percentage will be applied to that value for your total tax.
How Are Property Taxes Paid?
Generally, you have two methods for paying your property taxes. You can either pay them yourself when you receive the bill from the taxing authority, which is usually sent out either quarterly, annually or twice per year, or you can pay them through your mortgage payment.
Paying Your Taxes Through the Mortgage Company
Many people opt to use a mortgage escrow to pay property taxes, along with homeowners' insurance. Your mortgage company estimates how much your taxes will be for the year and then divides that number by 12 to determine how much you'll need to pay each month to pay the taxes. Your monthly mortgage payment will increase by that amount. Your mortgage company will create an escrow account, where it will deposit that excess payment and then pay the taxes from it when the time comes. If the estimate was too low and you don't have enough, the mortgage company will make up the difference and then increase your payment going forward to pay back the shortfall; if the estimate was too high, you'll get a refund.
Paying Your Taxes Directly
If you'd rather not pay through your mortgage company, you can pay your taxes on your own. You'll get a bill from the taxing authority either quarterly, twice a year or once a year with that period's taxes, and you'll have to pay it within a certain amount of time. This will reduce your mortgage payment, but you'll have to count on yourself to save the money to get those taxes paid.
What Happens When Property Taxes Don't Get Paid?
If you fail to pay your property taxes by the due date, the taxing authority will start charging you with interest and penalties. Additionally, in most states, the taxing authority automatically has a lien on your property for the amount of past due taxes.
What Is a Property Tax Lien?
A property tax lien is an encumbrance on your property, much like a mortgage, so that the taxing authority has a claim to that property in the amount of the past due taxes. If you sell the property, you have to pay it off before you can close. If you don't pay the taxes either on your own or by selling the property, eventually the taxing authority can try to sell the property to pay the taxes, even if there's already a mortgage.
Property Tax Foreclosure
When your back property taxes have been hanging on for too long, the taxing authority will take action. The most serious action the city or county can take is a tax sale, also called a tax forfeiture or a tax foreclosure, depending on where you live. State and local laws vary as to the procedure, but generally, you'll be notified that a tax sale is coming up, and if you don't pay the taxes in full by a specific date, you'll lose the house. The taxing authority will also notify your mortgage company and any other lienholders, and if they don't act, the sale may also get rid of their liens (although you'll still have to pay back any unpaid loans).
Redemption After a Tax Sale
Once a house has been sold at a tax sale, you may or may not have the ability to get it back; it all depends on your state's laws. Some states give you a certain period of time to redeem the property, but others do not. In Washington, for example, you lose all rights to the property once the sale is final unless you're a minor or legally incompetent, in which case you get three years to redeem the property and get it back. In Pennsylvania, on the other hand, the owner has nine months after the tax sale to redeem the property as long as the property was owner-occupied within the 90 days prior to the sale.
Dealing With Back Property Taxes: What You Can Do to Save Your House
If you owe back property taxes and you can't afford to pay them all at once, you may still have options for protecting your property from a tax sale. Your taxing authority may offer an abatement program through which you can enter into a payment plan to pay the taxes back over time, or you may be able to pay them back over time through a Chapter 13 bankruptcy case.
Property Tax Abatement
Most taxing authorities have programs for low-income individuals, the elderly or people suffering a financial hardship. These programs are often called tax abatement programs or tax forbearance programs. They may offer a repayment plan, or they may even forgive the back taxes entirely or in part if you can show a hardship so significant that you can't pay for your necessary living expenses.
Property Taxes in Bankruptcy
If you can't get a tax abatement, bankruptcy may help. Filing a bankruptcy case creates an automatic stay against any collection action by any creditor, and that includes tax sales and other actions by the taxing authority to collect the taxes. If you file bankruptcy before the tax sale occurs, the tax sale cannot go forward. This is true of any type of bankruptcy; however, if you want to keep the property, you will eventually have to pay the back taxes. A Chapter 7 bankruptcy, while not a repayment plan, will sometimes just give you the breathing room you need to figure out how to deal with the taxes. A Chapter 13 bankruptcy is a longer process and requires you to propose a repayment plan. You can use a Chapter 13 to pay the back taxes over time, and if your plan is within the requirements of federal bankruptcy law, your taxing authority will have to allow it.
Appealing Your Property Tax Assessment
Your risk of default on property taxes is much lower if the tax bill is more manageable. Because your taxes are assessed based on how much the county or city thinks your house is worth, you may be paying more than you should be. If your assessed value seems out of line with the reality of your neighborhood home values, you should be able to appeal the assessment. You can obtain your own appraisal and file an appeal with the tax board, who will review the appraisal and determine whether the assessment is too high. If they agree, your assessed value will be lowered, and so will your taxes.
Rebecca K. McDowell is an attorney focusing on creditor and debtor law. She has a B.A. in English and a J.D. She has written finance and tax articles for Pocketsense and eHow.