Liens, Taxes, and Foreclosures This course will provide a comprehensive study of all aspects of liens, titles and foreclosures, addressing all types of liens and their classifications. The course also will discuss taxes and their importance in the real estate industry. Finally, it will cover foreclosures and how to delay and dispute them. Chapters: • Chapter One: Liens • Chapter Two: Real Estate Tax Liens • Chapter Three: Taxes • Chapter Four: Foreclosures Learning Objectives: • Understand the difference between general and specific liens • Describe Ad Valorem taxes and the governmental bodies that impose them • Describe special assessment taxes and why they are in place • Identify the two components of depreciation and the basis of depreciation • Understand installment sales and how they are determined • Identify capital gain on home sales and the types of capital gain • Comprehend various types of foreclosures • Understand how to delay a foreclosure • Identify the obligations required of a buyer in a foreclosure Liens, Taxes, and Foreclosures Page 1 Chapter One: Liens all others, with some exceptions. The exceptions are for the following: • a judgment lien creditor who acquired a right, title, Introduction or interest, prior to the recording of the property A lien is a claim against property, made in order to tax lien; secure payment of a debt. The lien makes the property • holders of a security interest or mechanic’s lien; collateral against monies or services owed to another • a person or entity who bought the property or took person or entity. Collateral is an asset that has been title to it without knowledge of the lien. pledged by the recipient of a loan as security on the value of the loan. If the recipient of the loan is unable General Liens to repay the loan, the lender will look to the collateral A lien is general when it affects all property of the as a source for payment on the debt. debtor or all property in a certain class. There are several types of general liens. Liens are of two kinds: general and specific. In addition, there are voluntary and involuntary liens. Voluntary Judgment Liens liens are imposed by a contract between the creditor A judgment lien is a court-ordered lien that is placed and the debtor (e.g., when a lender holds a mortgage on against the home or property when the homeowner a property, it has a lien against the home). Involuntary simply fails to pay a debt. This doesn’t seem like a liens are imposed by law, such as when a lien is placed big deal, but when the homeowner has a judgment on a property for outstanding taxes and other unpaid lien against his or her home and wants to sell it, the debts. judgment lien has to be paid in full before the home or property can be sold. Judgment liens can be placed An encumbrance is a claim against, limitation on, or against the property for a variety of reasons such as liability against real estate. Encumbrances include unpaid credit card bills, utility bills, department store liens, deed restrictions, easements, encroachments, and bills, landscaping or home improvement bills, and just licenses. about any bill that the homeowner has failed to pay in a reasonable amount of time. Any bill that can cause an An encumbrance can restrict the owner’s ability individual to end up in court can result in a judgment to transfer title to the property, or it can lessen the lien. property’s value. It represents some right or claim of another to a portion of the property or to the use of the A judgment lien is different from a trust, in that the property. judgment lien holder cannot foreclose on the home or property as the trust holder can. Judgment lien holders Liens may be voluntary or involuntary, statutory or can demand payment, but ultimately they must wait equitable, general or specific. for the homeowner to sell the property before they can expect to be paid the money that they are owed Looking at Tax Liens according to the judgment. Luckily for the judgment On January 1, when the assessment roll takes effect for lien holder, the court will typically assign an interest the next tax year, a lien is placed on all assessed real rate to these liens so that the lien holder is compensated property in the amount of the tax due. Taxes on personal for waiting; the interest will continue to accrue until the property also may be liens on secured real property if debt is paid in full. Because the majority of people will they are listed with or cross-referenced to real property live in their home for quite some time, the interest can on the secured assessment roll. The assessor determines make a judgment lien grow, and grow, and grow over whether the real property is sufficient security for the the years so that it is quite large. personal property tax. At the taxpayer’s request, real property owned by the taxpayer elsewhere in the Estate and Inheritance Tax Liens county also may secure the personal property tax lien. Estate tax liens help protect the government’s interest Before the lien date, the assessor issues and records a in collecting federal estate tax liabilities. certificate to that effect. The real and personal property are cross-referenced in A general estate tax lien arises when a decedent’s estate the tax rolls. The property tax lien takes priority over fails to pay its estate tax liability. The general estate tax Liens, Taxes, and Foreclosures Page 2 lien attaches to all of the property that is included in franchise tax on corporations as a condition of allowing the decedent’s gross estate. The decedent’s gross estate them to do business in the state. Such a tax is a general includes all property owned at death, plus certain other statutory involuntary lien on all real and personal assets over which the decedent had sufficient control. property owned by the corporation. The lien does not attach to property that is outside of the decedent’s gross estate or property which (as part IRS Tax Liens of the gross estate) is used to pay court-approved estate In the United States, a federal tax lien may arise in expenses. The general estate tax lien is enforceable for connection with any kind of federal tax, including but a period of ten years following the decedent’s death. not limited to income tax, gift tax, or estate tax. If the estate tax is not paid when due, then “the Internal Revenue Code section 6322 provides: spouse, transferee, trustee, surviving tenant, person in Sec. 6322. Period of Lien. possession of the property by reason of the exercise, “Unless another date is specifically fixed by non-exercise, or release of a power of appointment, law, the lien imposed by section 6321 shall or beneficiary, who receives, or has on the date of the arise at the time the assessment is made and decedent’s death, property included in the gross estate” shall continue until the liability for the amount is “personally liable” for the estate tax. In this event, the so assessed (or a judgment against the taxpayer general estate tax lien then disappears and is replaced arising out of such liability) is satisfied or with a transferee tax lien. The transferee tax lien becomes unenforceable by reason of lapse of attaches “to all the property of such spouse, transferee, time.” trustee, surviving tenant, person in possession, or beneficiary, or transferee of any such person, except The term “assessment” refers to the statutory assessment any part transferred to a purchaser or a holder of a made by the Internal Revenue Service (IRS) under 26 security interest.” U.S.C. § 6201 (that is, the formal recording of the tax in the official books and records at the office of the The IRS may also seek to impose a special estate tax lien Secretary of the U.S. Department of the Treasury). in certain instances, such as where the estate consists Generally, the “person liable to pay any tax” described primarily of a closely-held business and it elects to in section 6321 must pay the tax within ten days of defer payment of the estate tax liability. Special estate the written notice and demand. If the taxpayer fails tax liens are “not valid as against any purchaser, holder to pay the tax within the ten-day period, the tax lien of a security interest, mechanic’s lien, or judgment lien arises automatically (i.e., by operation of law) and is creditor” prior to their being properly secured. The effective retroactively to (i.e., arises at) the date of the special estate tax lien is in lieu of, not in addition to, assessment, even though the ten-day period necessarily the general estate tax lien and transferee liens described expires after the assessment date. above. Under the doctrine of Glass City Bank v. United States, If the taxpayer does not fit into one of those categories, the tax lien applies not only to property and rights he or she may be able to negotiate with the IRS to to property owned by the taxpayer at the time of the reduce or abate tax penalties and interest. The IRS may assessment, but also to after-acquired property (i.e., to be willing to reduce or abate tax penalties and interest any property owned by the taxpayer during the life of if the taxpayer can show that he or she made an honest the lien). mistake. In some cases it is incumbent on the taxpayer to request that the government remove the interest.