Do Delinquent Property Taxes Affect Credit?
Unpaid property taxes don't directly hit credit, but liens and indirect effects can severely impact your financial future.
Property taxes are an annual levy by local governments on real estate, encompassing land and any structures built upon it. These taxes are a primary funding source for essential community services such as public schools, emergency services, and infrastructure. Failure to pay by the due date results in delinquency. Understanding the implications of delinquency, especially its influence on financial standing and credit, is important for property owners.
Understanding Property Tax Delinquency
Property tax delinquency occurs when assessed taxes are not paid by the due date. Delinquent taxes incur immediate penalties and interest, which accrue over time. For example, an initial penalty might be around 10% of the unpaid amount, with additional interest often accumulating at a rate of 1.5% per month or 18% annually until the balance is paid. This unpaid obligation becomes a legal claim against the property, known as a tax lien, recorded as a public record.
Local property tax authorities generally do not report property tax payment history directly to the major consumer credit bureaus, such as Equifax, Experian, or TransUnion. However, a tax lien, arising from non-payment, becomes public record. This public record status is how delinquent property taxes influence a property owner’s financial profile.
Impact on Your Credit Profile
Although major credit bureaus removed tax liens from credit reports in 2018, this does not mean delinquent property taxes have no effect on your financial standing. Lenders conduct public record searches and property title examinations. These searches reveal recorded tax liens, indicating unpaid obligations. A tax lien signals financial risk to creditors, as tax liens typically take precedence over most other property debts, including mortgages.
If delinquent property taxes remain unpaid, tax foreclosure is often the most severe consequence. Local governments can seize and sell the property to recover the debt. A completed foreclosure, a public record, severely damages a credit score and remains on a credit report for many years, hindering future borrowing. Additionally, in some jurisdictions, delinquent tax accounts may be sold or assigned to collection agencies. If these agencies report the debt to credit bureaus, it could result in a negative credit report entry, further impacting the score.
A tax lien can make it difficult to secure new financing, such as a mortgage, refinance a loan, or use the property as collateral. Lenders require a clear title, meaning no outstanding liens, before approving loans, as the lien holder has a superior claim. Even without a direct impact on a credit score, the public record of a tax lien can lead to loan denials or less favorable lending terms.
Resolving Delinquent Property Taxes
Addressing delinquent property taxes promptly avoids escalating penalties and severe consequences. Property owners can determine outstanding taxes by contacting their local tax assessor or collector’s office or checking online property records. This step provides clarity on the exact amount owed, including accrued penalties and interest.
The most direct resolution is paying the full delinquent amount, encompassing taxes, penalties, and interest. If a lump-sum payment is not feasible, many tax authorities offer payment plans, allowing owners to pay off the debt in installments over a set period, often one to five years. While these plans help manage the financial burden, interest typically continues to accrue on the outstanding balance until it is fully satisfied.
If a property has been sold due to unpaid taxes, many jurisdictions offer a “redemption period” during which the original owner can reclaim it. This period, commonly one to three years, allows reclaiming by paying the tax sale purchaser the full amount of delinquent taxes, penalties, interest, and associated fees. Once delinquent taxes are paid and the lien satisfied, ensure a release of lien is officially filed with county records, clearing the public record and restoring financial standing.