The taxes due are recorded as a lien against (ie they attach to) the property. You will not be able to take or record clear title until these liens are satisfied. The State/County/City are the lien holders. Unlike commercial mechanics liens for services or financial liens to banks tax liens cannot always be erased via bankruptcy by the debtor.
This is an issue that usually solves itself as most of the time as a seller (private or the state) or will have to price the property so that a buyer will be willing to pay the taxes due to acquire the property. Taxes due can, and have, blown up many a real estate deal when the buyer is under financial stress and the buyer’s attorney discovers thousands in back taxes that are recorded against the property the seller made no mention of. The seller has no money, the price negotiated is the minimum the bank is willing to take to release the property for, so who’s going to pay? Always a good time at the 11th hour of settlement.
I guess I’m just not seeing the legal theory behind it. I thought the purpose of the lien was that it gave you a claim of ownership if a debt is unpaid. But the debt being attached to the property itself seems like some kind of mummy’s curse.
This is like the equivalent of somebody having a job and not paying their income tax and the IRS declaring that the next guy who gets hired for that job owes the back income tax.
My WAG is that it makes more sense in a healthier housing market. Say a homeowner is in financial trouble and doesn’t make tax payments for a few years. They owe $10k in taxes on their $100k home. So they decide to sell the house and move across the country to live with relatives and find a new job. With that $10k lien, they find a buyer who will pay $90k for the house. The city gets the back taxes from the new owners, and doesn’t have to send the previous homeowner to collections (with little chance of repayment). The previous owners take the tax hit in the reduced selling cost, but they still manage to sell and move on with their life. The new owners get the house at a fair price.
Now, none of that works when the many are underwater on their mortgages, many houses are in foreclosure, and the property just isn’t worth the back taxes owed.
It just seems to me that the tax liability should remain with the person not the property.
Let’s say John Smith has a house and he doesn’t pay ten thousand dollars in property taxes. So the county seizes the house. It’s a real bad area so the house only sells for eight thousand dollars to Bob Jones.
Now to my way of looking at it, the county should be saying “Smith owed us ten thousand dollars. We took his house and sold it for eight thousand. So Smith still owes us two thousand dollars.”
But what’s happening apparently is that the county collected eight thousand for the sale of the house and now somehow has forgiven Smith for the other two thousand and placed that debt on Jones. How did Smith get pardoned? Can he now move back into town and buy another house with no obligation to pay his back taxes because he’s managed to dump his tax debt on to Jones?
And did the eight thousand dollars the house got sold for apply to the tax debt? Or is Jones supposed to pay the whole ten thousand dollars on top of the eight thousand he paid for the house? If so, then the county is now collecting eighteen thousand dollars on a ten thousand dollar debt.
Think of it more like a car loan. If I owe $10,000 on my $20,000 car, I can’t sell it to you for $20,000 and walk away with all the money, I have to give $10,000 to the bank to pay off my loan. I took out the loan, and not paying it will effect my credit, but there’s no way the bank is going to let that car change hands without getting their $10,000 out of it. Lets say I stop paying my loan, so they reposes the car and sell it to you for $12,000. You wouldn’t think of that as buying the car for $2,000, and paying off the $10,000 loan (though I suppose you could).
Think of the property taxes as a perpetual loan that renews yearly on the property (death, etc., etc.) The government is not going to let the property change hands unless they get their “loan” repaid. So you’re not buying a $5000 house, you’re buying a $5000 house and $10,000 in back taxes. If the house is worth more than $15,000 than it is a good deal. If the house is worth less than the $10,000 in back taxes, then it is a bad deal even at free. In some cases the government (like a short selling bank) may agree to wave some of the back taxes in order to collect some of them, or to just get rid of the house.
But a car loan doesn’t work like that. Let’s say the finance company repossessed the car and sold it for eight thousand dollars. They can’t ask the new owner to pay off the remaining two thousand dollars. The original owner still owes that two thousand dollars.
The bottom line is that they do it because they are the state and because they can. Attaching a debt to the property is a far more effective way of makes sure it gets repaid (at some point by someone) than any other available means. This is why (barring bankruptcy) that slapping a lien against real property is such a powerful tool for forcing repayment. If all debts were attached only to the person, not the property, the chances of repayment in default would be nil in most cases. The car company has to eat the shortage of they want to re-sell the vehicle at a market price, the state doesn’t have this requirement.